One of the hottest topics in divorce law both in Pennsylvania and across the country right now is alimony and how the new tax law, which went into effect on January 1, 2019, has impacted the way that alimony is calculated.
In Pennsylvania, orders and agreements that were in effect as of December 31, 2018 are still governed by the old tax law but all new orders and agreements in 2019 now fall under the new tax law so it is important that we understand how these new laws affect alimony.
In Pennsylvania, there are three types of “alimony”: 1) spousal support is support that is paid after a couple has separated but before they are divorced, 2) alimony pendente lite is alimony during the divorce, and 3) regular alimony is the support paid from one spouse to the other following the divorce.
Prior to the new law taking effect, the spouse paying the alimony (the payor) would have been able to deduct his or her alimony payments from his or her taxes, often resulting a significant tax break. For example, if a spouse paid $1,000 per month in spousal support, alimony pendente lite or alimony, that payor spouse would have a $12,000 write off and save federal taxes on $12,000 of income. At the same time, the spouse receiving the alimony, the payee spouse, would have to include that $12,000 as income and would then have to pay tax on that amount, reducing the next benefit to the payee spouse. The tax treatment of alimony has long factored into how divorcing spouses have structured support and property settlements. Accordingly the changes to the tax law prompted widespread concern among lawmakers and family law practitioners about how these changes could affect their clients.
In response to the new tax law, many jurisdictions, including Pennsylvania, revised their support guidelines in order to offset the change in the tax impact as a result of the new tax laws. Spousal support and alimony pendente lite are still calculated by mathematical formula but the formula has now changed.
Under the prior formula, spousal support and alimony pendente lite (in cases without dependent children) were calculated by simply taking 40% of the difference between the monthly net incomes of the spouses. So let’s assume the lower earning spouse earned a gross income $50,000 per year, and the higher-earning spouse earned a gross amount of $100,000 per year. Let’s also assume that the lower earning spouse netted $40,000 per year and the higher income spouse netted $70,000 per year. That leaves a monthly net of $3,333 and $5,833, respectively. Under the old guidelines, spousal support would be 40% of $2,500 (the difference between $3,333 and $5,833) or $1,000 per month.
In order to calculate spousal support or alimony pendente lite, under the new guidelines first, we take 33% of the higher earning spouse’s income, which comes out to $1,925 (rounding up to the nearest dollar). This number represents the higher earning spouse’s proportionate share of spousal support or alimony pendente lite. Next, we take 40% of the lower earning spouse’s income, which comes out to $1,333. This number represents the lower earning spouse’s proportionate share of spousal support or alimony pendente lite. We then subtract the lower earning spouse’s income ($1,333) from the higher earning spouse’s income ($1,925). The result, $592, represents the total monthly spousal support or alimony pendente lite payable from the higher earning spouse to the lower earning spouse. This amount is more than $400 lower than it would have been under the old formula. In changing the formula, the legislature sought to take into account the effects of the new tax law on support payments between divorcing spouses and as a result spousal support or alimony pendente lite tend to come out significantly lower than they would have under the old guidelines.
Alimony in Pennsylvania is still calculated pursuant to a set of seventeen factors instead of a formula. These factors have remained the same under the new guidelines and are discussed in this article.
In our post How The 2018 Tax Law Affects Alimony in Pennsylvania, Part 2, we discuss how alimony is calculated in some more complex cases including cases involving dependent children.