Yet another news outlet is reporting on the 2018 Alimony Race. NPR weighs in on why people are rushing to finalize divorces this year: so they can deduct alimony payments before the new tax law kicks in.
On Your Mark
As NPR reports, divorce lawyers and accountants have been advising many of their wealthier clients to hurry up and get divorced, like, now or at least before the end of the year because under the new tax law starting in 2019, a generous tax break for alimony payments will be gone.
The New York Times’, Jim Tankersley, who covers tax and economics stories, had a few things to say:
TANKERSLEY: So right now, if you get divorced – let’s say you’re a husband who is paying alimony to your ex-wife. You can deduct that, if you so agree with your spouse in the divorce settlement, from your taxes. But what’s going to happen is you won’t be able to anymore.
CHANG: OK, so spouses who will be on the hook for alimony payments will be eager to get their divorce settlements finalized this year but also, I can imagine, spouses who will be receiving the alimony payments because I would think that my soon-to-be ex would have more of a reason to give me more alimony if he or she gets a bigger deduction out of it this year.
TANKERSLEY: Yes, but it affects different couples differently. For couples who make essentially the same amount of money, if they’re in the same tax bracket, this is just an accounting shift. The same total amount of money changes hands.
TANKERSLEY: But for couples who make different amounts of money and are in different tax brackets, what they basically got before was a subsidy from the government for their divorce…
CHANG: What do you mean?
TANKERSLEY: …Because the higher-earning spouse was able to pass on income that would have been taxed at a really high rate but then instead was getting taxed at a low rate.
TANKERSLEY: So that difference between the tax rates was just free money from the government. Now that goes away. So, if you’re the husband, for example, who earned more and is paying that alimony to a wife, now you have to pay the taxes at the higher rate. That free money disappears, and so you are probably going to say to your ex-wife, sorry, there’s no more money; I’m not going to give you even more than I was originally thinking I was going to have to pay. And so, you the ex-wife end up with less money overall. And in between, the government gets more money.
CHANG: And I can imagine most couples that have severely disparate incomes – it’s usually the woman who earns less. So, this tax law change will probably have women bearing most of the cost.
TANKERSLEY: That’s what divorce lawyers and tax professionals and financial planners have been telling me – is that, yeah, it’s largely women who receive alimony. And particularly with wealthy couples, it’s largely women who leave the labor force to take care of kids or for whatever reason. And women earn less in the economy for the same work than men do. This is a potentially big loss for women…
Why it Matters
Spouses negotiating alimony payments may try to pay less when the change takes effect because there will be no tax savings.
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 NPR interview is here.