October 19, 2018
State and Federal Alimony Changes
In January 2019, New Hampshire will finally have an alimony law that provides a framework for setting alimony amounts, as well as standards for modifying and terminating support. At the same time, a new Federal rule will take effect that removes the tax aspect of alimony. The rule states that the payor will not be able to deduct payments from income nor will the payee claim them as income (this applies only to orders entered after December 31st). These two changes together are interesting; while, on the one hand, the NH law provides structure for determining support, the new Federal tax rules free us up to design alimony payments in ways that were not previously allowed. (For our Maine readers, your alimony laws have not changed but the Federal change is still important to you.)
In the Alimony Recapture Rule, the IRS states that if alimony steps down more than $15,000 between years 1 and 2, or years 2 and 3, then some part of the payment will be “recaptured” and will not be tax-deductible. This rule was designed to prevent payors from making one large payment to the ex-spouse in lieu of years of alimony payments, in effect a property settlement, and still claim the payment as alimony. Now that alimony is no longer tax-deductible, this rule won’t matter. The property settlement in lieu of alimony, as well as front-loaded alimony payments, will become an option. In addition, alimony also won’t have to stretch out to 3 years to avoid the recapture rule.
In the Child Contingency Rule, the IRS states that child support payments that end upon a date that is tied to one or more of the children is not deductible as alimony. This is because they see it as child support being disguised as alimony. As with the Alimony Recapture Rule, once alimony loses its tax-deductible status this rule won’t matter.
Removing the constraints of these two rules gives a couple more options for structuring alimony. It will now be permissible to utilize an upfront lump-sum payment in lieu of years of monthly payments, which is very attractive to couples with a lot of assets but not a lot of income, or to a payor who may be close to retirement. It will also be permissible to make large alimony payments for just one or two years instead of smaller payments for more years. Without worrying about the Child Contingency Rule, alimony can be tied to when the children leave high school or graduate college.
Therefore while the New Hampshire alimony law gives us a formula as well as more formalized guidance for calculating support amounts, we now have more options on how to transfer that money between spouses.