Rich Experience Incentive for Speeding Up Divorce

What is the new law?

A change in a new Republican tax law will remove a current tax break for any alimony payments that are finalized after December 31 of this year. This has prompted attorneys and financial planners to advise their wealthy clients to file for a divorce quickly if they have already been contemplating doing so.

Beginning in 2019, under the new law, Americans who either finalize or modify divorce agreements will no longer be able to deduct their alimony payments from their taxes. On the flip side, those who file for divorce and finalize their alimony agreements by the end of the year will still qualify for the old deduction. This is extremely valuable for couples in which one spouse makes a lot more money than the other or is in some way very financially superior.

Attorneys who ordinarily would tell their clients to take their time when thinking about filing for divorce, are now faced with a strange ethical dilemma. Though it may have ordinarily been in their best interest to take their time and to figure out what the right thing for them would be, this new law could affect 15 to 20 years of support, often times affecting the tax burden they would be faced with during their final working years.

What is happening now?

Up until now, Americans have been deducting their alimony payments from their taxes, which has had the potential to give them quite large tax breaks. According to the Internal Revenue Service, about 600,000 taxpayers claim the deduction annually. This means that they have been able to deduct their alimony payments (regardless of size) from their income prior to calculating what they owe in taxes.

Currently, the rich deduct more in alimony than the rest of the population. About 20% of taxpayers who currently claim this deduction fall within the top 5% of household income earners. By eliminating this benefit, those who earn substantially different amounts of income will be hurt more, as those who are the higher earner often negotiate higher payments because they are then able to deduct the full amount from his or her income. Now with this new law, more pressure is placed upon the higher earner to pay more in spite of their tax benefit, or face hurting them if they pay less in order to account for the lost tax break.

Lawyers have warned that the loss of the alimony deduction may ultimately hurt women and children more, as women are more frequently recipients of the payments, which are likely to decline in lieu of the new law, potentially affecting the welfare of children involved. This is because although child support payments are not deductible, so-called unallocated support – payments that are intended to support a divorcing spouse and children at the same time – is deductible. Unfortunately, this will also end for any new or modified divorce agreements beginning in 2019.

However, not all results of the new law should prove negative. The Joint Committee on Taxation has estimated that eliminating the tax break will actually increase federal revenue by $7 billion over the next decade.

Although it is too soon to tell if more couples will rush to divorce in light of the new law, what is most certain is that the payer of alimony will have much more leverage to negotiate lower spousal support going forward.

Posted in: Family Law