Trump Tax Cuts Eliminate Maintenance Deductions

Trump Tax Cuts Eliminate Maintenance Deductions

President Trump’s new tax reform law, the 2017 Tax Cuts and Jobs Act (“Act”), is a sweeping change to the federal income tax. Among its many impacts, the Act affects Wisconsin family law actions by changing or eliminating the federal income tax rules for the child tax credit, standard deduction, personal exemptions, and mortgage interest deductions, among others. One of the starkest impacts of the Act involves maintenance payments. Maintenance (previously called “alimony”) are payments from one spouse (or former spouse) to the other, structured around two main objectives: “fairness” and “support.”

Maintenance Payments Prior to the 2017 Tax Cuts and Jobs Act

Before the Act, the spouse paying maintenance (the “payor”) could deduct each dollar paid in maintenance from his or her taxable income. The “payee” spouse was required to treat the maintenance received as taxable income. The structure provided the potential for significant tax savings for payors with even modest maintenance obligations.

Maintenance Payments After the 2017 Tax Cuts and Jobs Act

The Act eliminated the maintenance deduction, as well as the taxability of the payments to the payee. The new structure only applies to maintenance orders:

• originally granted after December 31, 2018, or
• maintenance orders modified after that date, but only if the modification clearly states the new rules apply.

Under the Act, the taxability of maintenance payments is the same as child support payments, in that there is no tax savings benefit for a payor spouse. In other words, new support orders granted as of January 1, 2019 cannot be tax deductible to the payor spouse, even if the parties wanted to do so. Since the Act is new, there are still holes within it that have yet to be filled. For example, it is not definitively decided if a court can order a modification of a pre-2019 maintenance obligation operating under the new rules without the consent of both parties. Clarity will come once the IRS and courts tackle these outstanding issues and provide guidance for how parties should proceed.

Impacts of the Maintenance Deduction Elimination

With the elimination of the maintenance deduction, spouses can no longer shift the tax burden of the payments to the payee spouse. The shifting of the tax burden was often advantageous to both spouses, as the payee spouse was generally taxed in a lower tax bracket, which resulted in less tax liability owed and more money remaining between the spouses. For example, under the previous structure, a payor spouse earning $80,000 annually with a $745 monthly maintenance payment was paying approximately only $529 per month as maintenance after factoring in the income tax savings. That’s a savings of approximately $2,600 annually. For maintenance orders initiated after December 31, 2018, the tax savings is eliminated. For maintenance claims currently pending, the looming deduction elimination may have an impact on how a spouse proceeds. A spouse who is seeking maintenance may try to prolong the matter until after December 31, 2018, so as to avoid the taxability of the payments. Payor spouses may want to run the calculations, both with and without the deduction, so as to better gauge the importance of obtaining an order during 2018.

We Can Help

In addition to the possible tax impacts, there are many other considerations to explore when examining a maintenance claim. Therefore, if a spouse seeks or may be asked to pay maintenance, a comprehensive discussion of the maintenance laws in Wisconsin is essential. If you have questions about maintenance or divorce generally, please contact one of the Hawks Quindel family law attorneys by calling 414-271-8650 in the Milwaukee area or 608-257-0040 in the Madison area.