Some Unintended Consequences of the Tax Cut and Jobs Act of 2017
One of the more interesting conversations about any new law, and certainly about any new tax law, is the one about the “unintended consequences” that will or do follow from the law’s adoption. In the case of the federal Tax Cuts and Jobs Act of 2017 (TCJA), and in the context of family law in Pennsylvania, the discussion of both intended and unintended consequences is largely about the effect the TCJA has had and will have on alimony, alimony pendente lite, and spousal support.
To begin with what the TCJA did, effective January 1, 2019, it reversed what had been the long-standing federal tax consequence for those who pay and for those who receive alimony, alimony pendente lite (APL) and spousal support. Under the law effective through the end of 2018, the payor was able to reduce his or her IRS taxable income by the amount paid as alimony, APL or spousal support, and the recipient of such payments was required to declare the total received as taxable income. While certain exceptions are possible, for all practical purposes, the old law meant that the IRS collected tax revenue at the lower tax rate of the recipient, instead of at the higher tax rate of the payor. Pursuant to the TCJA though, for orders entered on or after January 1, 2019, the payors of alimony, APL and spousal support may not deduct those payments from their taxable income, and the recipients need not declare the amount received as taxable income. The TCJA does allow a new modification (made after January 1, 2019) to an old order (one entered prior to January 1, 2019), to retain the tax character and consequence in effect at the time the original order was entered, if the order so specifies.
While one of intended consequences of the new law may have been to increase revenue by collecting income tax at the presumably higher tax rate of the payor rather than at the lower rate of the recipient, the bigger benefit intended for the government may have been to eliminate the perennial discrepancy between the gross amount deducted from the income of payors (quite a bit more), and the amount added to income of recipients (quite a bit less). That discrepancy meant that there was no tax revenue collected at any tax rate on “quite a bit” of income. It is too soon to tell what the effect will be on IRS revenue, but that will be one point of interest to watch.
On the private side, what may have been the first unintended consequence of the TCJA, though it was widely expected as 2018 wound down, was the rush to finalize divorce, alimony, APL and spousal support agreements before the year ended. Many cases were reportedly resolved specifically so that the resulting court order would be administered under the old IRS rules. In Pennsylvania, just before the end of 2018, the state’s Supreme Court adopted new support rules, also effective January 1, 2019. The new rules made several other changes to the support system, but the biggest change was to the ARL/spousal support formula, in an effort to “compensate” for the tax effect of the TCJA. Notwithstanding the intuitive benefit of the TCJA to the recipient of APL/spousal support, under the new formula, many reports are that the recipient is less well-off and, considering his/her tax liability, has less money “in hand” than s/he had under the old rules.
One more thought about unintended consequences looking forward is for parties who may have entered into a pre or an ante-nuptial agreement in contemplation of the old tax rules. If the agreement encompasses an alimony/APL or spousal support provision, the parties may want to revisit and modify that agreement because the tax consequences they contemplated when they made the agreement will not be the consequences they will face, if the terms of their agreement are entered as a court order.
It is important to consult qualified and experienced counsel when considering this or any aspect of divorce, and the lawyers at the Law Office of Gregory LaMonaca look forward to discussing these considerations with you.