Revenue Administrative Bulletin 2021-19

TREATMENT OF ALIMONY AND SEPARATE MAINTENANCE PAYMENTS

Pursuant to MCL 205.6a, a taxpayer may rely on a Revenue Administrative Bulletin issued by the Department of Treasury after September 30, 2006 and shall not be penalized for that reliance until the bulletin is revoked in writing. However, reliance by the taxpayer is limited to issues addressed in the bulletin for tax periods up to the effective date of an amendment to the law upon which the bulletin is based or for tax periods up to the date of a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted or have expired that overrules or modifies the law upon which the bulletin is based.

RAB 2021-19.  This Revenue Administrative Bulletin (RAB) addresses: (1) the treatment of alimony and separate maintenance deductions under Part 1 of the Michigan Income Tax Act (MITA); (2) the effect of the federal Tax Cuts and Jobs Act (TCJA) on alimony and separate maintenance deductions; and (3) the TCJA's effect on whether alimony is included in total household resources for purposes of the homestead property tax credit and the home heating credit.

LAW AND ANALYSIS

1. Alimony or separate maintenance deductions under Part 1 of MITA.
   
   Statutory framework of MITA. Under the MITA, Michigan "taxable income" for individuals is federal adjusted gross income (AGI) subject to certain adjustments.[1]  Among the adjustments are the allocation and apportionment provisions in Chapter 3 of the MITA.[2]  For residents,[3] Chapter 3 allocates income from any source to Michigan except for income allocated or apportioned under sections 111 to 115.[4]  For nonresidents, generally, wages, gambling winnings, and business income earned, received or acquired through activity in Michigan are allocated or apportioned to Michigan.[5]  Michigan resident payer spouse. A Michigan resident payer spouse is not required to make a Michigan adjustment to AGI for any alimony or separate maintenance payments, including any alimony or separate maintenance payments that were deducted in another state.  
   Michigan resident recipient spouse. A Michigan resident recipient spouse must include all alimony or separate maintenance payments that are included in the recipient's AGI.
   
   Nonresident payer spouse. The MITA does not explicitly address the treatment of alimony or separate maintenance payments for nonresident payers and recipients. However, the State's treatment of such payments, if any limitations on the deduction afforded nonresidents differ from those afforded residents, must be "reasonable in effect and based on a substantial justification other than the fact of non-residence."[6] In its decision in Lunding v New York Tax Appeals Tribunal, the U.S. Supreme Court held that the State of New York's denial of an income tax deduction for nonresidents' alimony payments violated the Privileges and Immunities Clause of the United States Constitution.[7]

    

   A nonresident who is the payer spouse may allocate a portion of an alimony or separate maintenance deduction to Michigan if the deduction was included in AGI. The Michigan deduction is the federal alimony deduction[8] multiplied by the ratio of income earned in Michigan to federal gross income.
   
   For example, Payer, a resident of New York, earned total wages of $50,000 (which is also Payer's gross income). Payer paid alimony payments of $15,000 to Recipient. Payer's AGI was $35,000. Payer allocated $10,000 of wages to Michigan for work performed in this state. Payer's Michigan income is $10,000 of wages less an alimony deduction of $3,000[9] for net taxable income before personal exemption of $7,000.
   
   Nonresident recipient spouse. In Lunding, the tax treatment of the recipient spouse's alimony income was not before the Court, and therefore, the MITA's provisions govern the treatment. Under MITA, there is no reciprocal adjustment to AGI that would require the nonresident recipient spouse to allocate alimony or separate maintenance payments to Michigan in the same amount as the payment deducted in this State by the payer spouse. A nonresident recipient spouse has no Michigan taxable income from the payment even if the payer spouse is a Michigan resident.
   
   
2. Effect of the TCJA on separate maintenance and alimony payment deductions.
   
   Before the TCJA,[10] the payer spouse of alimony or separate maintenance was allowed a deduction for those payments under IRC 62(a)(10) and IRC 215 in calculating AGI. Conversely, the recipient spouse recognized the payments as gross income under IRC 61(a)(8). The payer spouse's deduction of the payment and the recipient spouse's recognition of the payment as income continues to apply to any divorce or separation instrument executed before January 1, 2019.[11] This treatment also applies to divorce or separation instruments executed before January 1, 2019, but modified on or after that date, as long as the modification does not do the following: [12]

    

   • change the terms of the alimony or separate maintenance payments; and
   • state that the alimony or separate maintenance payments are not deductible
   by the payer spouse or includable in the income of the receiving spouse.
   


3. Michigan residents: The treatment of alimony and separate maintenance payments for purposes of the homestead property tax credit, the home heating credit, and the farmland preservation tax credit.
   
   The homestead property tax credit[15] and the home heating credit[16] (credits under Chapter 9 of the MITA) are not affected by the allocation or apportionment of alimony and separate maintenance payments between states. Nor is the farmland preservation tax credit[17] (a state tax credit granted under the Farmland and Open Space Preservation Act). Therefore, the Lunding decision does not apply to the calculation of the credits. However, the credits are affected by changes to adjusted gross income under the TCJA. For divorce decrees and separate maintenance agreements executed after December 31, 2018, the TCJA will affect the calculation of total household resources (THR), which is used to calculate the Chapter 9 MITA credits, and the calculation of household income (HHI), which is used to calculate the farmland preservation tax credit.
   
   Total household resources and household income. Chapter 9 credits are based on formulas that include "total household resources."  THR is defined as:

    

all income received by all persons of a household in a tax year while members of a household, increased by the following deductions from federal gross income:



1. Any net business loss after netting all business income and loss.
2. Any net rental or royalty loss.
3. Any carryback or carryforward of a net operating loss as defined in section 172(b)(2) of the internal revenue code.[18]

The farmland preservation tax credit is based on the calculation of "household income." HHI is defined as all income received by all persons of a household in a tax year while members of a household.[19] The losses listed above in the THR definition are not added back when calculating HHI.

"Income," as used in both the definition of THR and HHI, is federal AGI plus all income specifically excluded or exempt from the computation of federal AGI.[20] Although "income" uses AGI as its basis, the Chapter 9 claim forms[21] require claimants to separately report each item that is included in AGI, rather than starting with the aggregated AGI.[22]

Divorce or Separation Instruments executed before January 1, 2019.  For claimants of Chapter 9 credits or a farmland preservation tax credit whose divorce or separation instruments were executed before January 1, 2019, the TCJA does not change the calculation of THR or HHI for either the payer or the recipient. The payer spouse's AGI will include a deduction for alimony or separate maintenance payments that will flow into the payer spouse's THR or HHI without adjustment. The recipient spouse's AGI will include the alimony or separate maintenance payments as income that will also flow into the recipient spouse's THR or HHI without adjustment. Because the claim forms list each item of AGI, the recipient spouse will report alimony received as a separate income item and the payer spouse will deduct alimony paid as "other adjustments."

Divorce or Separation Instruments executed after December 31, 2018. For claimants of Chapter 9 credits or a farmland preservation tax credit whose divorce or separation instruments were executed after December 31, 2018, the TCJA changes the calculation of AGI and therefore, THR and HHI for both spouses. The payments are neither a deduction from income for the payer spouse nor a recognition of income for the recipient spouse. The payments are spousal transfers incident to divorce or separate maintenance. The congressional Joint Committee on Taxation stated in its staff report on the TCJA that the intent of the proposal was to follow Gould v Gould,[23] in which the United States Supreme Court held that such payments are not income to the recipient.[24] For purposes of the Chapter 9 credits and the farmland preservation credit, a payer spouse cannot claim a deduction for a payment that was not included in the recipient's spouse's AGI. Therefore, the payer cannot claim a deduction under "other adjustments" on the claim form. Further, the recipient spouse does not report the alimony or separate maintenance payments under "alimony" on the claim form.



 

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[1] MCL 206.30.

[2] MCL 206.101 to MCL 206.195.

[3] MCL 206.110(1).

[4] Net rents and royalties, MCL 206.111; capital gains and losses, MCL 206.112; interest and dividends, MCL 206.113; patent and copyright royalties, MCL 206.114; and business income, MCL 206.115.

[5] MCL 206.110(2).

[6] Lunding, v New York Tax Appeals Tribunal, 522 US 287 (1998). 

[7] U.S. Const, Art IV, section 2, provides that "[t]he Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States."

[8] IRC 62(a)(10), repealed by Pub L 115-97, title I, §?11051(b)(2)(A), Dec 22, 2017, and IRC 215, repealed by Pub L 115-97, title I, § 11051(a), Dec 22, 2017, generally effective for any divorce or separation instrument executed after December 31, 2018.

[9] Prorated alimony deduction formula:  $15,000 total alimony x ($10,000 Michigan wages/$50,000 total wages) = $3,000.

[10]  Tax Cuts and Jobs Act, PL115-97, enacted December 22, 2017.

[11] Id, Sec. 11051(c)(1).

[12] Id, Sec. 11051(c)(2).

[13] Id, Sec. 11051(a) (repeals IRC 215) and Sec. 11051(b)(2)(A) (repeals IRC 62(a)(10)).

[14] Id, Sec. 11051(b)(1)(A) (repeals IRC 61(a)(8)).

[15] MCL 206.520.

[16] MCL 206.527a.

[17] MCL 324.36109.

[18] MCL 206.508(4).

[19] Former MCL 206.508 in effect in 2011.

[20] MCL 206.510(1).

[21] MI-1040CR (homestead property tax credit), MI-1040CR-2 (veterans and blind people), MI-1040CR-7 (home heating credit), and MI-1040CR-5 (farmland preservation tax credit).

[22] The farmland preservation tax credit claim form, MI-1040CR-5 uses a modified THR-THR less the loss deductions added back into THR.

[23] Gould v Gould, 245 US 151 (1917).

[24] "Description of H.R. 1, The 'Tax Cuts and Jobs Act,'" prepared by the Staff of The Joint Committee on Taxation,

 November 3, 2017, JCX-50-17, p.61.