What could make divorces more contentious? The new tax law
February 22, 2018
LAYWER: Madeline Marzano-Lesnevich, Esq – Divorcing couples may have a harder time settling their finances beginning next year due to a change in federal tax law, and attorneys warn that could add some bitterness to an already sour process.
Currently, people can write off alimony paid to ex-spouses, a point divorce attorneys often use to help reach settlements, since both parties can benefit. The person paying support is more willing to agree to higher payments because it reduces his or her taxable income, and the recipient gets more support. But the tax law President Donald Trump signed at the end of 2017 will eliminate that deduction for new divorce agreements, a move divorce attorneys fear could harm separating families and complicate a process often settled outside of the courtroom.
Without the deduction, the person paying alimony is being taxed on more income, said David Levy, founding partner of Chicago matrimonial law firm Berger Schatz. That’s also expected to leave less money for the person receiving the support, since there’s less in the pot to divide.
Alimony, also called maintenance or spousal support, can be awarded to either spouse and is decided through an agreement or a court order. Currently, the recipient is taxed on the money, but the new law shifts the tax burden to the payer.
Many states, including Illinois, have guidelines for how to calculate the amount of support an ex-husband or ex-wife should receive. Some say those guidelines will need to be rewritten. Alimony also is a factor when determining child support payments in Illinois, and the effects of the tax change could affect those calculations as well.
It’s the breadwinner in a divorcing family who ends up paying alimony to the spouse who makes less.
For Champaign-area resident Kichecko Dawson, the alimony she receives is a lifeline.
Shortly before her divorce proceedings began, Dawson said, she was diagnosed with stage 4 breast cancer and a condition called hydrocephalus, in which fluid accumulates on the brain. Her divorce was finalized in 2015, and she was awarded maintenance. She uses that money to help pay for her medication and health insurance.
“Had the tax laws been different then, I could have gotten less money,” said Dawson, 47. “My family would have been completely impacted gravely if I couldn’t afford my medication or my health insurance or stuff like that, which I need desperately in order to survive.”
Ultimately, the changes could alter the way divorce cases are settled, said Madeline Marzano-Lesnevich, president of the Chicago-based American Academy of Matrimonial Lawyers.
Without the incentive of reducing taxable income, the person paying support could be less willing to be generous, she said. That could mean longer legal battles as divorcing spouses work to reach a settlement and added hostility as they argue over money.
More than three out of five respondents to an American Academy of Matrimonial Lawyers survey said they expect divorces to become more acrimonious as a result of the tax change. And that’s the one thing you don’t want in family law, Marzano-Lesnevich said.
“You don’t want the impact of that and the hostility that that could engender to trickle down to the children,” she said. “Those people still have to be co-parents.”
The changes will affect judgments entered into after Dec. 31. Expect a rush of soon-to-be divorced couples scrambling this fall to make their separations final, Marzano-Lesnevich said.
Eventually, though, this will become the new normal for divorcing couples and their lawyers, said Dan Rahill, a tax partner at accounting firm BDO’s Chicago office and past board chairman of the Illinois CPA Society.
There will be some hitches along the way, but it is a math problem, Rahill said. Divorce attorneys and their clients know how alimony is calculated now as far as percentage of income. Under the new rules, they’ll just have to factor in that it is no longer deductible to the alimony payer or taxable to the recipient, he said.
Illinois has guidelines for calculating alimony that bake in the tax consequences. Many divorce attorneys say those guidelines will need to be altered in a way that considers the alimony deduction’s elimination.
This all comes on the heels of a change in the way child support is calculated in Illinois. A state law took effect in July that plugs parenting time into the child support algorithm. Previously, child support was based on the net income of the payer. Child support is not tax deductible and isn’t affected by the recent changes to the federal tax code.
There has been conflict over that child support change, with some working to log parenting time in hopes of winning more support, said Mark Smith, founder and partner at law firm Engelman & Smith and board chair at The Lilac Tree, an Evanston nonprofit that helps people navigate divorce.
Alimony also is factored into child support calculations, and the elimination of the deduction for payers adds more uncertainty for divorcing families and their lawyers to contend with.
“The whole thing is just a shifting landscape, one after another,” Smith said. “If anybody has a crystal ball, I’d like to hear how it’s all going to turn out.”