Experts predict a surge in divorce cases this year. Why is this year different from all other years? Because in all other years, alimony is deductible to the spouse paying alimony, and next year that deduction will be eliminated.
What’s Happening to Alimony?
Currently, there is a tax deduction for people paying alimony. The tax deduction can substantially reduce the cost of alimony payments. So, for people in some tax brackets, every dollar you pay in alimony to your former spouse really could only cost you a little more than 60 cents.
The alimony deduction has been in the tax code since 1942. But, because of the new tax law, people paying alimony may not be able to deduct their alimony payments, and anyone receiving alimony will no longer report it as income.
According to the ABA, lawyers are advising you divorce now, before the 76-year-old deduction for alimony payments is wiped out in 2019 under the Tax Cuts and Jobs Act.
If you’re going to get a divorce, get it now. Potential divorcees have all of 2018 to use the alimony deduction as a bargaining chip in their negotiations with estranged spouses.
Divorce and Taxes
The new tax code changes will impact your divorce, but it isn’t the only tax which causes people to make the decision to divorce. I’ve written about the area of divorce and taxes before.
For example, the 2012 American Taxpayer Relief Act raised taxes on couples making more than $450,000, and individuals making more than $400,000. As it turns out, some couples found out they could save over $25,000 a year if they divorced.
The New Tax Law
Many divorce lawyers criticize the new law to end the alimony deduction, saying it will make divorces worse.
People won’t be willing to pay as much in alimony, which will disproportionately hurt women who tend to earn less and are more likely to be on the receiving end of alimony payments.
Conversely, the alimony deduction has also been criticized. For example, the government argues the deduction is a burden on the IRS because, if the alimony amounts ex-spouses report paying and receiving don’t match, it can force the agency to audit two people who may already be feuding.
Why it Matters
Spouses negotiating alimony payments may try to pay less when the change takes effect because there will be no tax savings.
In many cases, women are more likely to be hurt by the change as they negotiate divorce terms. U.S. Census Bureau statistics showing that 98 percent of the 243,000 people who received alimony payments last year were women.
The deduction is a big deal to couples negotiating their divorce because if someone who earns, say, $250,000 agrees to pay $4,000 per month in alimony, it really costs the person about $3,000 after taking the deduction into account.
Without the break, many people will agree to pay only what would have been their after-tax amount. It is feared that more couples will end up fighting in court because they won’t be able to agree on alimony.
The alimony deduction repeal doesn’t take effect immediately and won’t kick in until 2019. That is why lawyers are advising clients to file for divorce now.
However, meeting the 2019 deadline won’t be easy.
Some states have mandatory “cooling-off” periods, others states have residency requirements. So, you can’t just file for a divorce today, and expect that you’re going to be divorced tomorrow.
The ABA article is here.