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BBA Endorses Fix for Alimony-Deductibility Conundrum

March 21, 2019

This week, the BBA Council endorsed a measure designed to fix a problem dropped in our laps by a recent change in federal tax law.  To get there, though, we’re going to have to work our way through a discussion of alimony, tax deductions, and a little math.  (Or, just skip to the last two paragraphs!)

When Congress undertook a massive overhaul of the federal tax code near the end of 2017, they included a ticking time-bomb for divorce lawyers and their clients—one set to go off at the very end of 2018: Starting in 2019, all newly-ordered alimony would not be deductible from the payor’s gross income (nor attributable to the payee’s) for federal tax purposes.

For divorcing couples, this amounts to the IRS reaching deeper into their collective wallets—or, depending on how you look at it, the end of the federal government partially subsidizing alimony.  That’s because until this year, couples were able to shift that amount of income from the payor to the payee—who quite often, even with alimony included, occupied a lower tax-bracket than the payor, meaning the amount of alimony was taxed less than it otherwise would be.

In one sense, this is logical, since the payor doesn’t truly enjoy the benefit of this income, as it flows through to the payee.  In another sense, it helped somewhat in resolving alimony disputes, because while the payor could be said to have “lost” that amount of income, the loss was reduced by a consequently lower tax burden.

Consider an alimony payment of $10,000 per year, with the payor in the 25% bracket and the payee in the 10% bracket.  The former’s taxes go down by $2500, but the latter’s rise by only $1000.  It’s as if the couple has an extra $1500, thanks to the feds.

Now that’s been wiped away, the federal government gets paid first, and it makes for less money to go around in alimony cases.  But in Massachusetts, in particular, it presents a dilemma, because of the way our statutory alimony guidelines operate.  When alimony reform was enacted in 2011, language was added to say that, for general alimony, a judge should award “30 to 35 per cent of the difference between the parties’ gross incomes”, or the payee’s need—whichever is smaller.

At the time, it was assumed that alimony would remain federally tax-deductible, and the 30-35% range offered a consensus rule of thumb for achieving the desired outcomes (though a judge can always deviate from that guideline “upon written findings that deviation is necessary”).  Now, however, with the new tax law shifting the burden of paying taxes on alimony from the payee to the payor, the 30-35% rule is producing skewed, unintended results—yet judges are left without clear guidance on what to do about it.

Enter Marc Bello, a forensic accountant who specializes in marital disputes.  He explored hundreds of scenarios, with differing levels of payor and payee incomes, to calculate the after-tax impact of the federal change on Massachusetts couples.  What he found was that (a) under the new regimen, payees were ending up with more take-away income than before—sometimes as much as the payor; but (b) this problem could be solved by adding a new percentage guideline for non-deductible alimony.

(This would be as good a time as any to point out that alimony remains deductible by payors for Massachusetts state-tax purposes.  And that alimony payments made pursuant to pre-2019 orders remain federally deductible.)

Marc concluded that in virtually all situations, applying a rule that alimony should equal 23-28% of the difference in the parties’ incomes (when alimony is not deductible) leads to the same after-tax outcome as the current 30-35% rule does (when alimony is deductible).  After his presentation to the BBA’s Family Law Section, they voted to endorse a change in the percentage guidelines to reflect his findings.

Some in the legal-services community expressed concern that their clients might be negatively affected, but after Marc delved further into the low-income scenarios behind his research, our Delivery of Legal Services was satisfied that the proposal would effectively maintain the status quo even in such cases.  They voted to endorse specifically the 23-28% range, out of fear that if the new figures were any lower, they could then begin to harm low-income payees.

After presentations to our Executive Committee and Council this month by Family Law Section co-chairs Lisa Wilson of Wilson, Marino & Bonnevie, P.C., and David Friedman of Rackemann, Sawyer & Brewster, the Council voted to support the 23-28% guideline for non-deductible alimony, which would sit alongside the existing 30-35% guideline for deductible alimony.

This proposal has also won the endorsement of the Massachusetts Bar Association, and the Women’s Bar Association, and we hope that this unified front will help us convince the Legislature of the urgency of the issue.  We will next seek a sponsor to file legislation and advocate for its timely enactment.

—Michael Avitzur
Government Relations Director
Boston Bar Association