Strange Things are Afoot at the Circle K

As the half of the eponymous adventurers in the 1989 opus “Bill and Ted’s Excellent Adventure,” Ted Logan advises that “strange things are afoot at the Circle K.”  Contained inside the proposed tax bill that is now making its way through Congress is an important provision

for domestic relations practitioners and any individual who either receives spousal support or pays spousal support.  According to an analysis by the New York Times, the tax deduction for spousal support would be terminated for any divorce or separation agreement that awards spousal support after 2017 or modifies a pre-existing spousal support obligation that occurs subsequent to 2017.

Spousal support means any payment or payments made to a spouse or former spouse as both his/her sustenance and support.  In a divorce or legal separation action, the domestic relations judge may award reasonable spousal support to either party.  There are particular factors found in O.R.C. §3105.18(C)(1)(a-n), which determines whether spousal support is appropriate and reasonable.  Factor “l” is the “tax consequences, for each party, of an award of spousal support.”  In representing clients who pay spousal support, it has often been a selling point to advise one’s client that Uncle Sam is assisting you in the payment of your spousal support as that spousal support payment is tax deductible straight from the parties’ gross income.  The spousal support recipient must pay income tax on the amount of that support at their marginal tax rate.  I would suggest that the “spread” between the obligor’s tax rate (up to 39.6%) and the recipient’s tax rate (as low as 10-15%) represented a significant loss to the Treasury.  Although this factor (tax consequences) is already contained in the Ohio statute, the previous guidance that was given to spousal support payors and recipients mayl require a different analysis, and most likely a reduction, in the monthly spousal support obligations in most counties.  This may also change the way that certain counties calculate future support in divorces or legal separations.

Pre-existing spousal support awards would maintain their tax deductible to obligor/taxable to obligee character.  However, any future modifications of that existing spousal support obligation would, by proposed law, lose the tax deductible/taxable nature.  Therefore, obligors may want to review their spousal support obligation for additional change of circumstances if the court retained jurisdiction over the amount of support to determine if a reduction in their spousal support obligation would outweigh the present tax write off.  How the respective courts will react and adapt to this new proposed modification of existing tax law and whether their domestic relations practitioners counsel their clients regarding the new version of tax ramifications on spousal support payment and receipt may lead to strange things if the tax bill becomes approved, signed into law, and then digested by the state courts.

For more information, please feel free to contact Matthew Sorg at msorg@pselaw.com or call 937-223.1130.

AUTHOR: Jan Burden
JBurden@pselaw.com