Trump’s tax bill will make 2018 a wild year for divorce
January 10, 2018
LAWYER: Madeline Marzano-Lesnevich, Esq. — On Jan. 10, 2018, People typically rush into marriage, not divorces. But a curious change in the GOP’s tax bill means that some couples — or individuals — might rush back to the courthouse.
The GOP tax bill signed by Trump late last year fundamentally altered many aspects of the tax code, sending accountants scrambling, and stands as the biggest change to the tax system since 1986. Despite long-standing calls to address the federal debt, the tax cuts outlined in the bill came out to be pricey, projected to cost $1.5 trillion or more, with insufficient revenue gains to pay for it.
One way the Republican bill writers tried to raise revenue to compensate for the cuts was through alimony. Under the new bill, alimony paid by one spouse to the other will not be tax deductible, and the spouse receiving the alimony no longer has to pay taxes on it. In the current system, it works the opposite way, with the payer deducting the full amount and the recipient paying taxes on the alimony at a rate of 15%. The new rule means the government will end up with more of a divorcing pair’s combined money.
When news dropped that this might be included in the bill in November, things got crazy.
“When everyone thought the deduction deadline was going to be Dec. 31, we had a rush of clients,” said Madeline Marzano-Lesnevich, president of the American Academy of Matrimonial Lawyers. “All of a sudden we had clients who were going to be receiving alimony demanding we get them divorced immediately.”
Ultimately the law won’t take effect until next year, giving divorcing couples a reprieve. But the law does set up 2018 to potentially be a wild year for divorces.
“Under the new tax bill, things are going to change somewhat drastically and it’s difficult to predict how it’s going to affect parties,” Sheera Gefen, a divorce attorney in New York, told Yahoo Finance.
It almost sounds like the plot of a Coen brothers movie. In some states, the alimony-seeking spouse may have significant incentive to delay the divorce settlement in order to get the tax benefit in 2019. Meanwhile, the alimony-paying spouse could try to rush it through so they could secure a deduction. What could go wrong?
Divorces could get a lot messier
Potentially, a lot.
Attorneys like Gefen and Marzano-Lesnevich will likely have a much harder time keeping things civil and amicable in divorce disputes, because the alimony payer isn’t only going to have to pay, but will also lose a key deduction.
“The payer spouse could potentially suffer a much higher financial burden and that’ll make settlement discussions more difficult, more difficult to swallow,” said Gefen. “I think it’s going to cause more fights — and tension between attorneys.”
Perhaps the largest and most uncomfortable tension will stem from timing. One side could be dragging its feet in an attempt to delay, and the other will be trying to get a deal signed before New Year’s.
“Depending on who you’re representing you might want to drag it out,” said Gefen. “I’m either going to likely attempt to expedite settlement of global negotiation, or I might want to delay the ultimate.”
This isn’t so in call cases. In states like New York, there’s a formula for calculating appropriate payments and less leeway for negotiations, so timing may be critical. But for some other states, it’s an open negotiation.
“Every state is different,” said Marzano-Lesnevich. In states like New Jersey, without a formula, there is considerable incentive for both parties to hustle because the receiving spouse will end up netting less income for a similar out-of-pocket expense from the paying spouse.
An example of the change
Marzano-Lesnevich illustrated what it’d be like, using a wealthy client as an example. Under the old system, if a highest-tax bracket, soon-to-be ex spouse was set to pay $100,000 per year in alimony, they would get a deduction off the top — at the highest tax rate of around 40% — so they would only be out around $60,000. The recipient would end up with $85,000 after paying a 15% rate on that $100,000.
For couples divorcing in 2019, if the wealthier spouse paid $60,000 — the same out-of-pocket cost as the example above (they’d have less money without the deduction) — the other spouse would only get $60,000.
“We’re shifting the tax, and it’s not to the detriment of the person receiving the money,” said Marzano-Lesnevich.