Media around the country is reporting something new: lawyers are counseling clients considering divorce to file for divorce right now! Why is there a sudden rush in advice to file for divorce in 2018 if it wasn’t so important before?
What’s Happening to Alimony?
According to Politico, for example, 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.
Currently, there is a tax deduction for people paying alimony which substantially reduces 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.
Under the new tax code though, the alimony deduction is about to be history. The change is an example of how the tax law is having far-reaching consequences beyond its corporate and individual tax cuts, and quietly overturning decades of tax law.
Divorce and Taxes
The new tax code changes definitely 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.
Think about that for a second. If you could save over $25,000 a year in taxes, you could take a trip to Italy, ski Deer Valley, put a little cash away for college, and still have some mad money to spend just by divorcing and turning their marriage into a long term relationship.
Back then I advised speedy divorce seekers to take it slow: judges can deny you an expedited divorce if you are looking for a quick split – even if that would mean over $25,000 in tax breaks.
There are also a lot of risks in a speedy divorce, known and unknown. Consider how a divorce will impact your relationship. There is no fake divorce. Once the court signs the final judgment, you are 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, they say, 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
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 Politico article is here.