Tax overhaul likely to affect those contemplating divorce

February 12, 2018

LAYWER: Madeline Marzano-Lesnevich, Esq –   For the past five years, certified divorce financial analyst Donna Cheswick has sent a monthly email to several hundred people to inform them of divorce issues.

This year’s January email — which explained how the recent tax overhaul would impact alimony — triggered her first round of telephone call responses.

“They want to know if they should move forward on a divorce,” said Ms. Cheswick, owner of Cheswick Divorce Solutions in Harrison City and Sewickley.

Thanks to the recent passing of the federal Tax Cuts and Jobs Act, married couples contemplating divorce will have an extra incentive to get their agreements signed, sealed and delivered before Dec. 31.

The most drastic tax overhaul since 1986 will radically change the way divorce settlements have been negotiated for the past 75 years. The key: It eliminates the tax deduction for spouses who pay alimony and makes alimony income tax-free to the recipient of alimony payments.

It has, until now, been the reverse.

“This was often an incentive for the higher-earning spouse to pay more alimony,” said Madeline Marzano-Lesnevich, president of the American Academy of Matrimonial Lawyers in Hackensack, N.J. “People are trying to get divorces done before Jan. 1, so there is a rush to get cases done by the end of the year.”

Alimony, also known as spousal support, often is part of divorce agreements when there is a wide discrepancy in earnings between the husband and wife, and when the marriage has lasted for more than a few years.

According to the Internal Revenue Service, close to 600,000 Americans claimed a spousal support deduction on their Form 1040 tax returns in 2015, totaling $12.3 billion. The data indicates 98 percent of alimony recipients that year were women.

The new tax rules will not affect existing divorces.

Divorces granted before the end of this year will fall under the current tax law, which allows ex-spouses who pay alimony to deduct the expense from their federal income taxes and requires ex-spouses receiving alimony payments to claim the money as taxable income.

The end result of the rule change, divorce attorneys and family law experts say, is that more money will end up going to the government.

That is because, in most cases, the spouse paying alimony is in a much higher tax bracket than the spouse receiving the money. The difference between the tax brackets provides a benefit to the spouse paying the alimony and an even greater benefit to the one receiving it — because the spouse receiving support payments is getting more in actual dollars than the spouse paying it.

For example: Say an ex-husband is required to pay $40,000 a year in alimony and he is in the 33 percent tax bracket. Deducting this amount from his income saved him $13,200. The ex-wife, in this scenario, doesn’t work. Therefore, the $40,000 puts her in the 15 percent tax bracket where she is taxed $6,000.

This couple saves $7,200 that would have gone to the government.

The new rules will cause a higher amount of income between two ex-spouses to go towards taxes.

“We used to give more to the receiving spouse because the paying spouse got the deduction for alimony,” said Kenneth Horoho, a partner and family law attorney at Gentile, Horoho & Avalli, Downtown.

“This tax law will throw that whole process out of whack,” he said, adding that lawyers would often lump other divorce-related expenses into the alimony settlement — such as child support and equitable distribution of assets — in order for the spouse paying alimony to get a bigger tax deduction.

Child support, which is separate from alimony, has never offered any tax deduction. But attorneys often negotiated for child support obligations to be included in the total alimony payment. That maximized the tax break for the spouse paying alimony.

“Divorce lawyers used alimony creatively for the family’s benefit and now it’s gone,” Mr. Horoho said.

Pa. to look at its system

Pennsylvania’s guidelines for temporary spousal support prior to a divorce are based on the paying spouse receiving a tax deduction. Those will need to be re-calculated based on the new tax law.

Dan Durst, chief counsel for the domestic relations procedural rules committee in Harrisburg, said the committee — which advises the state Supreme Court on matters related to divorce, support, custody, paternity and protection from abuse — will be reviewing the issue at its next meeting.

“We were tracking this as it was being discussed and now that the tax code has changed we are reviewing the legislation to propose any rule amendments to the courts,” said Mr. Durst. “It would be up to the court to make any changes.”

The number of divorces in the state has been on a decline since 1991 when they hit an all-time high number of 41,321, according to the Pennsylvania Department of Health. There were 33,749 in 2016, the most recent data available.

The overall U.S. divorce rate has remained essentially unchanged in 20 years, according to the 2012 Census Bureau’s American Community Survey. However, for people ages 55 to 64, the risk of divorce more than doubled and for those 65 and older, the rate tripled.

Less motivation to be generous

Frederick Frank, a Pittsburgh divorce attorney with the law firm Frank, Gail, Bails, Murcko & Pocrass, said the new tax rules took many divorce lawyers by surprise because there was very little discussion about it in the weeks before it passed. Mr. Frank represents the Post-Gazette in press matters.

He said the effect will be to make settlement discussions much tougher to swallow for the paying spouse. “The current alimony deduction is unique in that it is a dollar-for-dollar deduction against the paying spouse’s income.”

For example, a person with a taxable income of $400,000 who is ordered to pay $100,000 in alimony would have his taxable income reduced to $300,000. If he is in the 33 percent tax bracket, the support payments really only cost him $66,000 in taxable income.

“The bottom line is the person paying alimony will not be as motivated to be as generous going forward because they will lose the deduction,” Mr. Frank said. “This will handicap all parties’ ability to reach a resolution in divorce cases where alimony may be involved.”

Financial analyst Ms. Cheswick noted the tax change may speed up the timeline for some couples.

“I tell them anyone who believes they are a candidate for alimony should consider moving forward sooner rather than later because after Dec. 31 it will take away the incentive for the higher wage earner to be more willing to pay alimony.

“I anticipate people who are already in the divorce process who are moving at their own pace and not necessarily in a big hurry to finalize things may want to explore how alimony may or may not affect their settlement agreement,” she said.

“Alimony is not guaranteed. But if anyone is a candidate, this new tax law really puts a crimp in things.”