Major amendments to the Internal Revenue Code resulting from the Tax Cuts and Jobs Act of 2017 became effective on January 1, 2019. One of the most significant changes brought about by those amendments is that payors of alimony pendente lite (monetary support to a spouse during divorce litigation, also known as spousal support) and alimony can no longer deduct their payments. In addition, payees are no longer required to report such payments as income, for tax purposes.
As Pennsylvania’s Support Guidelines were based on the prior reality that spousal support payments were deductible by the payor and reportable by the payee, the Supreme Court of Pennsylvania entered an order on December 28, 2018, which amended the guidelines effective January 1, 2019. Among other things, these amendments are focused on revising the formulas for determining how spousal support is calculated to account for the fact that spousal support payments are no longer tax deductible for orders entered on or after January 1, 2019.
It is helpful to review examples of calculations both pre- and post-amendment.
Starting with the pre-amendment guidelines, consider a scenario where the only issue is spousal support and where the payor earns $10,000 per month net, and the payee earns $5,000 per month. Based on the amount of gross income that the payor would need to earn to net $10,000 per month, assume that the payor pays roughly 19% of his gross income for federal income taxes.
Under the prior guidelines, the payee’s $5,000 per month net is subtracted from the payor’s $10,000 per month net resulting in a difference of $5,000. That difference is then multiplied by 40% to yield a spousal support amount of $2,000 per month. As this amount would be tax deductible under the prior guidelines, then the payor would receive a 19% or $380 tax benefit for being able to deduct a $2,000 spousal support payment. Therefore, as a practical matter, it would only “cost” the payor $1,620 to pay $2,000 of spousal support.
Under the amended guidelines, the calculation is slightly different.
Using the same income amounts, the payor’s proportionate share of spousal support is 33% of the payor’s monthly net income of $10,000, or $3,300. Whereas, the payee’s proportionate share of spousal support is 40% of the payee’s monthly net income of $5,000, or $2,000. The payor’s proportionate share of spousal support of $3,300 is then subtracted from the payee’s proportionate share of spousal support of $2,000 to result in a non-deductible monthly spousal support obligation of $1,300.
As a consequence, the payor does substantially better under the amended guidelines which result in a $1,300 per month spousal support payment which is not tax deductible. Conversely, under the prior guidelines, the payor’s obligation would be $2,000 per month, but with a $380 tax deduction, resulting in the payor being out of pocket approximately $1,620 per month (i.e., $2,000 – $380 = $1,620). Therefore, the payor essentially saves $320 per month (i.e., the difference between $1,620 and $1,300) by operation of the amended guidelines in comparison to the payor’s obligation under the prior guidelines. In this example, the operation of the amended guidelines results in a windfall to the payor.
The benefit to the payor when child support is also involved, however, is not nearly as significant.
Based on the pre-amendment guidelines, a payor who nets $10,000 per month would be required to pay child support for one child of $1,223 per month to a payee who nets $5,000 per month. The spousal support obligation is calculated by subtracting the payee’s $5,000 per month from the payor’s $10,000 per month which results in a difference of $5,000. The payor’s child support obligation (i.e., $1,223) is then subtracted from the $5,000 difference to yield a sum of $3,777 which is then multiplied by 30% resulting in a spousal support obligation of $1,133 per month.
As that spousal support payment is tax deductible under the prior guidelines, the payor will get a tax deduction of roughly 19% or $215. Therefore, while the payor’s total child support and spousal support obligation would be $2,356 per month under the prior guidelines (i.e., $1,223 per month child support + $1,133 per month spousal support = $2,356), it will really only cost the payor $2,141 per month after considering the tax deductibility of the payor’s spousal support obligation (i.e., $2,356 – $215 = $2,141).
Under the amended guidelines, when child support is involved, the payor’s spousal support obligation is $1,000 per month. This amount is calculated by determining the payor’s proportionate share of spousal support by multiplying the payor’s $10,000 monthly net income by 25% resulting in the sum of $2,500. The payor’s proportionate share of spousal support is then calculated by multiplying the payee’s $5,000 monthly net income by 30% to result in the amount of $1,500. The payor’s proportionate share of spousal support of $2,500 is then reduced by the payee’s proportionate share of spousal support of $1,500 to result in a spousal support payment of $1,000 per month.
After considering the payor’s spousal support obligation, the resulting child support amount for one child is an additional $1,100 for a total of $2,100 per month. As can be seen, this amount is fairly close to the payor’s total child and spousal support obligation under the prior guidelines, after considering the tax deductibility of the payor’s spousal support obligation (i.e., $2,141 per month under the prior guidelines after account for tax deductibility versus $2,100 per month under the post-amendment guidelines).
Based on these examples, a payor who is obligated to pay just spousal support substantially benefits from the amended guidelines whereas a payor who is obligated to pay both child support and spousal support ends up in a very similar position under both the pre- and post-amendment guidelines. Results will, of course, vary from case to case as there is a multitude of factors and considerations that must be accounted for and analyzed. Of critical importance, it must be further noted that there are different considerations under the amended guidelines for the subsequent modification of support orders entered before January 1, 2019, and also different considerations for alimony awards which are not addressed by the post-amendment guidelines.
The divorce and family lawyers of Shemtob Draganosky Taylor can assist you with all aspects of your support case whether you are the payor or the payee, and can also guide you through all facets of any other family law matters that may be affecting you. Call our family lawyers in Montgomery County at (215) 544-3974 for a confidential discussion.
Reprinted with permission from the 2/8/2019 issue of The Legal Intelligencer. © 2019 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.