Updated for 2020, learn from a family law attorney if spousal support changes and APL guidelines help or hurt, in terms of one’s personal cash flow.
On December 28, 2018, new Pennsylvania spousal support changes and APL guidelines were issued that took effect on January 1, 2019. Litigants and lawyers both need to understand the new Pennsylvania Guidelines. If it is time for an award of support, everyone who gets or pays spousal support (or alimony pendente lite, “APL”) will be affected by the change to the support rules.
Since 1980, a dependent spouse can get support from the income superior spouse during the pendency of the divorce called alimony pendente lite (APL). There are some limits as to the length of time and in some cases, the dependent spouse will not qualify. In most cases, however, when a married couple is separated, spousal support applies; if a divorce is pending, APL applies regardless of the claim that the recipient is at fault.
The biggest change in spousal support/APL: new formula and approach for first time orders
The biggest change in calculation of spousal support/APL was triggered by the change in the tax laws. Effective January 1, 2019 new orders for spousal support, APL and alimony no longer have special tax treatment. Before that date, an order or signed agreement would lead to the inclusion of the amount in the taxable income of the recipient and a tax deduction for the payor. Voluntary payments without an agreement or order never qualified for the special tax treatment.
That meant that if someone paid $1,000 a month in spousal support, APL or alimony, the payor got a $12,000 tax write-off and would save federal taxes on $12,000 of income. In comparison, the recipient would have another $12,000 of taxable income so the receipt of the money came with a price tag.
The purpose of the rules is to offset the change in the tax impact. No longer will a new spousal support, APL or alimony agreement or order trigger the tax impact.
The change in support rules for new awards starting in 2019 means the amount of the payment is going to drop to adjust for the absence of the tax benefit or bite. If a person was paying spousal support, APL, or alimony and enjoyed that extra deduction, that payor will continue to keep the tax benefit under the old tax laws because it is based on a pre-2019 order or agreement. The payor might not want to modify the order in 2019. A new order will not continue the tax deduction benefit. In many cases where the payment was significant and the tax benefit was significant, the payor and payee will be disappointed by the new guidelines. The discounted obligation may not be comparable to either the payee’s or payor’s after tax benefit.
The 2nd critical difference under the new rules: reallocating the “extras”
There is a second critical difference in the approach to spousal support under the new Rules. The new Guidelines provide for the initial calculation of spousal support/APL and then the support court will shift that amount of money from the payor to the recipient, and the payor will have lower net income for the purpose of contribution to expenses in addition to the monthly Guideline amount. Likewise, the recipient is deemed to have higher net income to pay for extras. This changes the percentage contribution to reasonable extra expenses. The extras include medical insurance premiums and uncovered medical. When there are children, the adjusted percentages apply to child care, educational needs and some extra curricular expenses.
For example, in the past, if the payor made four times as much money as the payee, assuming $4,000 per month net of taxes, while the recipient earned $1,000 net a month, the payor was obligated to pay 80% of medical insurance premiums and 80% of medical expenses (which are in excess of $250 per year). For children the payor also owed 80% of child care, necessary educational expenses, and some extraordinary expenses that were found to be appropriate for the family. That percentage contribution has now changed for every new case that includes spousal support/APL under the January 1, 2019 amendments to the rules.
Using the hypothetical, if the income superior spouse nets $4,000 per month, and the lower income spouse nets $1,000 a month, with the new formula the dependent spouse will get $700 per month in spousal support. The dependent spouse will then be assigned income of $1,700 a month, and the income spouse will have income of $3,300 per month. The income superior spouse will no longer owe 80% of medical insurance and the extras, but only 66%.
With the shift in relative income, the support guidelines for a family with combined income of $5,000 will pay combined $1,415 per month for two children. For this hypothetical, assume the family medical insurance is employer provided and assume payor has partial custody, under 40% of the time. Under the old approach the higher income spouse would pay 80% of the Guideline child support amount; that parent would owe $1,132 to the dependent spouse. Starting in 2019, due to the shift of income as a result of spousal support/APL, the income spouse only owes 66% or $934 a month. The total (spousal and child) under new rules is $1,634. Under old rules the total was about $1,664. A decline of $30 appears a modest difference.
Parents will feel the bigger impact of the shift in percentage contribution to extras like medical insurance, educational needs and child care. If educational and child care total $2,000 per month the split is now $1,320 by payor; $680 by lower income parent. Compare that with $1,600 or $400. The contribution to medical and extras will shift significantly.
For spousal support without children, the payor owes $920 under the new Guidelines, compared with $1,200 under the old rules. If the payor owed taxes based on a 25% tax bracket the drop is not so significant, however, the dependent spouse now owes 38.4% of medical insurance and uncovered medical (after the first $250 per year). The payors who were at a higher tax bracket can no longer deduct spousal support, but pay less toward medical expenses.
In summary, if you only pay or get child support, the changes in the rules are relatively modest. In contrast, the shift in the approach to payment of spousal support or APL changes the amounts for all.
The regulations from the IRS only partially clarify the modification questions
If someone is paying spousal support, APL, or alimony starting before 2019 and enjoys that extra deduction, at time for modification the parties will usually continue to keep the special tax treatment under the old tax laws because it updates a pre-2019 order or agreement. The parties will continue to treat the payment as deductible by the payor and included in the recipient’s income, unless the parties put in writing that they want to forego the old tax treatment. The question arises in the event the pre-divorce spousal support/APL is replaced by a new order under a separate provision in the law, the alimony award. Is this a new Order or in the nature of modification of a pre-2019 obligation? Each taxpayer needs to check updated IRS regulations to determine if this qualifies as a modification of the pre-2019 award or if it must lose that tax treatment under the tax law change effective in 2019. Until the IRS clarifies this, it’s important to get specific tax advice.
If you are in need of assistance regarding 2019 Spousal Support changes or new APL guidelines in Pennsylvania or surrounding areas, please contact Family Law Attorney Mary Cushing Doherty at 610-275-0700 or email her at firstname.lastname@example.org.