Many people assume New York and IRS tax rules are identical when it comes to taxing spousal support payments. Before the Tax Cuts & Jobs Act of 2017 (“TCJA”) was enacted, New York and federal law were the same. However, the TCJA changed federal law, and New York decided not to follow suit. The result is added complexity for parties negotiating spousal support now, and different rules depending on when a couple divorced or separated.
New York versus Federal tax rules
As discussed in a previous post, the TCJA made a substantial change to federal tax law. Prior to the TCJA, federal law provided that spousal support was taxable income to the payee (i.e., the spouse receiving the support) and the payor (the one paying support) got a tax deduction in the amount of the payment. The new law shifted responsibility for paying the tax on support payments. Payees no longer pay the tax; the payor does, and there is no tax deduction. This went into effect for all divorce judgments and separation agreements signed after December 31, 2018.
New York opted not to follow the TCJA tax rules. Instead, under New York State and local tax laws, payees pay the tax and payors get a tax deduction for support payments, provided, however, there is a signed separation agreement or divorce judgment in place.
When calculating their New York adjusted gross income (NYAGI), taxpayers are instructed to:
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- “Subtract from your federal adjusted gross income (FAGI) any applicable alimony or separate maintenance payments you made in the tax year, and
- Add to FAGI any applicable alimony or separate maintenance payments you received in the tax year.”
Essentially, New York and federal law are the exact opposite.
Timing of Your Divorce or Separation Agreement
The changes in federal law only apply to judgments of divorce and written separation agreements signed after December 31, 2018. Therefore, judgments and agreements before that date still follow the old federal rules where the payee pays the tax and the payor gets a deduction. The reason for requiring a judgment of divorce or written separation agreement is so the government can be sure that the payee no longer has the right to income from the payor as a married spouse.
Negotiating Spousal Support
The TCJA complicated spousal support negotiations because a big incentive to get the payor spouse to settle spousal support was its tax-deductibility. Previously, a higher-income spouse may have been willing to pay more spousal support because he or she would receive the benefit of a tax deduction. That is no longer possible.
Since the TCJA went into effect, courts and parties have been grappling with how to come to a fair resolution. At this time, courts seem to prefer to keep the payee spouse in the same position as he or she would have been in but for the tax law change, rather than to pass the full cost resulting from the tax law change on to him or her.
In practice, this has meant that the amount of federal tax the payee spouse would have paid if the support payment were taxable to them is deducted from the payment paid by the payor spouse.
Ultimately, the parties should consult an experienced attorney and financial expert to negotiate the best result under opposing federal and state laws. Please feel free to contact us to learn how we can help you achieve a positive result in your matter.
