Alimony tax changes may scorch divorcing couples
Figuring out alimony has always been difficult for divorce lawyers, mediators and couples trying not to be couples.
Thanks to the new tax code, it’ll be even tougher.
In previous years, the pain of alimony stemmed in large part from each state having its own set of rules. These determined how much alimony payments should be and when such payments should end.
“There’s not really a cohesive rationale for alimony,” said Mary Kay Kisthardt, a professor of law at the University of Missouri-Kansas City School of Law. “In any given state, we’re not sure what we’re trying to do.”
For the last 75 years, however, one rule was clear: Alimony was deductible for the payer, and the recipient paid income tax on it.
The new code delivers a disruption to those who work in divorce — and those who go through it, experts say, by upending this constant in a highly subjective legal arena. Under the Tax Cuts and Jobs Act, in all divorces after Dec. 31, 2018, alimony will no longer be deductible for the payer, and taxes don’t need to be paid on it by the recipient.
Lawyers are scrambling to understand and react.
“There’s not really a cohesive rationale for alimony. “
Justin Reckers, a certified divorce financial analyst in California, said judges and lawyers in the state use a certain software to calculate alimony. That system is now unusable.
“Those guidelines rely heavily on the tax codes,” Reckers said.
As a result, he predicts that divorces may become messier. Offering tax relief to alimony payers, he said, often helps to move the negotiations along.
“It’s a lost tool for the purpose of settling cases outside of the court system,” he said. “You might see more cases go to court now.”
Tom Leustek, founder of advocacy group New Jersey Alimony Reform, said he was shocked by the change. Soon after the legislation passed, he wrote a report on its potential impact, and sent it to the office of New Jersey Gov. Phil Murphy.
“The two households created by a divorce simply cannot function as cheaply as the single household of an intact family,” it reads. “The present tax structure that helps ameliorate those burdens has now been eliminated.”
“We can’t afford to get divorced without that tax benefit, so we’re going to stay together, and I don’t mean happily.”
Under the old code, a household’s income received tax relief through divorce because the higher-paid earner (typically, with the bigger tax bill), is transferring income to the lower-paid spouse, (who often has a less burdensome tax rate).
Some people might be less able to afford divorce now, said Ken Neumann, director of the Center for Mediation and Training in New York City.
Such couples, he said, could reason: “We can’t afford to get divorced without that tax benefit, so we’re going to stay together, and I don’t mean happily.
Neumann said he’d been receiving calls from confused mediators.
“They’re asking, ‘What’s going to happen? Are we going to negotiate differently?’ We don’t know what the law is,” he said.
“On the face, it looks like it will benefit women. “
Uncertainty about the new laws is already causing problems.
Reckers said alimony recipients have been calling, asking if they should modify their existing alimony agreements to adhere to the new tax code — so they don’t have to pay taxes on it anymore. He warned them: don’t see this as a windfall.
For one, experts say it’s still unclear if existing alimony agreements modified in 2019 would be subject to the new rules. Regardless, the changes are likely to bring in less money for the recipient, because the payer will “have less money from which to pay” without the deduction.
Neumann provided a hypothetical example. A man who earns $500,000 a year and is in the top tax bracket is paying his wife $100,000 a year in alimony — but it only costs him roughly $50,000, after the tax break. The ex-wife receives the $100,000, but is left with $75,000 after taxes.
Now, Neumann said he could see many cases where the ex-husband will argue that he can only afford $50,000, and the ex-wife would be left with $50,000 a year — or $25,000 less.
(The majority of alimony payments are made by men, although the percentage by women has been growing).
“On the face, it looks like [the new law] will benefit women,” Neumann said. “[But] she’s going to take the biggest hit.”
“You used to be able to give people some idea. Now, we don’t really know. “
In addition to receiving less money, the alimony recipient may also have a harder time contributing to a retirement account, since those contributions often have to be from taxed income.
“Now that will not be money she could put in an IRA,” said Madeline Marzano-Lesnevich, president of the American Academy of Matrimonial Lawyers.
Many couples will be rushing to get their divorces finalized in 2018, to avoid the new tax issues, said Heidi Webb, an attorney and the founder of Consilium Divorce Consultations in Lincoln, Massachusetts.
“A lot of questions have been raised,” Webb said. “You used to be able to give people some idea. Now, we don’t really know.”
“People are already so vulnerable during divorce,” she said. “This is exacerbating all of that.”
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