How to Calculate Alimony in 2019 and Going Forward
It’s July of 2018 and we’re on the precipice of a very interesting change in the tax code in 2019. Going forward, alimony is no longer going to be deductible. How do you calculate alimony with this change? Read on to learn more.
Tax Code Changes Are Significant
These changes are significant because for as long as I’ve been practicing and as many other lawyers have been out, alimony was always tax-deductible, and it was always based on gross income. In the past, we would have a way of calculating it where we took the two incomes, the gross incomes, we subtracted them and took one-third of the difference.
I’m not saying that this was the best way or the most efficient way of doing it. As a matter of fact, it was actually in the case law that says, “We’re not supposed to do it that way,” but everybody did, because there was just no better way to figure out alimony. Since everybody had been doing it for so long, we continued to do it, right or wrong.
What Are the Changes?
The main difference now is that alimony’s not going to be based on gross income; it’s now going to be based on net income. The calculation has been entirely different. Now as far as I know, I haven’t heard anybody comment on how we’re actually going to do this yet, but I have a couple of ideas of how I’m handling it with clients going forward.
- Do a hypothetical tax return. Aside from the fact that alimony’s not deductible anymore, there are several changes to the tax code that are coming into effect in 2019 that will affect the alimony calculation.First, there are new tax rates. Before the advantage of having tax deductible alimony was often allowed. Because of the different tax rates between the paying spouse and the receiving spouse, it allowed us to shift income because of the tax havens. We don’t have that anymore. Now we have to look at the net income, so we have to first do a hypothetical tax return by looking at the new tax rates.Second, there also could be a loss of some, if not all, of the real estate and mortgage interest deductions that we had in the past, which will now impact you’re actual net number.
Lastly, there have been some changes in the child-related deductions that we used to get.
All these changes together are going to impact the tax return, so I recommend that we do this first, so we’re looking at what the net number is. Because again, that’s the number we’re going to be using alimony from.
- Look more closely at the Case Information Statement (CIS). In the past, this document was always filed in the worst case. In my opinion, it’s probably the most important document, but it’s rarely been used when calculating alimony. Again, everybody would take the income and the difference and that was just the easy way of doing it. Now we really have to look at the lower earning spouse’s needs and how they’re going to change in the future. So the CIS needs to be really, really thoroughly reviewed.
- Determine the need base. Reviewing the CIS and the tax returns are going to leave you with the numbers that are needed as well as tell us what income is available for paying and what income is needed. We don’t know how to bridge the gap between the two, but it’s possible that we might go back to this one-third analysis or maybe even a new sort of standard rule is going to surface, but right now we don’t have one.
From this point on, I’m not really sure what we’re going to do with it. For practitioners like me, it’s going to be a little bit of an exciting time. Because it’s a change, and it’s a new area for all of us, a lot of us are going to be on equal footing. Before, you might have had attorneys who are practicing decades before you. Now, we’re all gong to be on equal footing and even the litigants are going to be in equal footing, because nobody is going to really know what to do. This might actually cause a greater level of cooperation.