In the latest Weekly Wright Report:
- Upcoming Changes to the Tax Law Affecting Alimony- read now
- A FMLA Pitfall Story – Not to Be Repeated – read now
Upcoming Changes to the Tax Law Affecting Alimony
The Federal tax laws that were enacted in 2017 will have a profound impact on how alimony payments are treated for tax purposes, and in turn, will likely change how alimony issues will be addressed in divorces beginning January 1, 2019. Traditionally, spousal support payments incident to a divorce or written separation agreement have been deductible as income to the payor spouse and includable as income to the recipient spouse. That will no longer be the case for couples who get divorced or sign a separation agreement beginning January 1, 2019.
As long as the IRS allowed alimony payments to be “tax-effected,” a spouse paying alimony derived a tax benefit because that spouse’s tax liability was reduced as a consequence of being able to deduct alimony payments from income. At the same time, to assure that the IRS did not fully lose the tax revenue associated with alimony payments, the recipient of alimony was required to include alimony as income. In most cases, the spouse paying alimony is in a higher tax bracket than that of the spouse receiving alimony. Savvy lawyers and tax advisors have used the difference in marginal tax rates of divorcing spouses, which can sometimes be significant, to employ creative tax planning in divorce settlements.
As a perhaps unintended consequence of the traditional tax laws relating to alimony, the IRS was losing revenue because alimony was being taxed at the lower tax rate of the recipient rather than at the higher tax rate of the payor. That loss of tax revenue is cited as the chief reason for the upcoming changes to the tax law affecting alimony. According to the Joint Committee on Taxation, eliminating the tax effect of alimony will increase Federal tax revenues by $6.9 billion over the next 10 years.
Those who were divorced or signed a separation agreement on or before December 31, 2018 will not be impacted by the new tax law. For them, alimony payments will to continue to be deductible for the payor and taxable to the recipient. That is true even if an alimony award that was established before January 1, 2019 is modified after the new tax law goes into effect.
The neutral tax treatment of alimony under the new tax law will almost certainly affect how lawyers negotiate alimony terms in divorce settlements and change how judges treat alimony awards in contested divorce cases. It remains to be seen the degree to which that will happen.
A FMLA Pitfall Story – Not to Be Repeated
File this one under “FMLA fails.” An HR Generalist at a large company went out on leave for the birth of her first child. She provided supporting medical paperwork to the company’s benefits coordinator. The paperwork showed that the new mom would be medically cleared to return to work after 6 weeks following delivery of the child. Upon reviewing the paperwork, the benefits coordinator reached out to the HR Generalist and said that she looked forward to seeing her after 6 weeks. The HR Generalist, knowing her rights under the Family Medical Leave Act, wrote back to the benefits coordinator with a copy to the HR Director stating that she planned to take 12 weeks for the birth of her child, which included time to care for and bond with the child. The HR Director, upon reviewing the medical paperwork and consulting with the benefits coordinator, insisted the employee return to work in accordance with her medical documentation.
Wrong! The FMLA entitles an eligible employee to take up to 12 workweeks of job-protected unpaid leave for the birth or placement of a son or daughter, to bond with a newborn or newly placed son or daughter, or to care for a son or daughter with a serious health condition. The employee’s entitlement to FMLA leave for birth and bonding expires 12 months after the date of birth.
Importantly, both mothers and fathers have the same right to take FMLA leave for the birth of a child. Birth and bonding leave must be taken as a continuous block of leave unless the employer agrees to allow intermittent leave (e.g., allowing a parent to return to work on a part-time schedule for 10 weeks).
Don’t create liability by denying FMLA leave to eligible employees and subjecting your company to a lawsuit. A simple phone call to yours truly will help you navigate this complicated federal act.
Want more? Visit the Weekly Wright Report page to browse past issues.