Will 2018 Be the Year of the Divorce?
On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act. In an effort to pay for the tax cuts in the new law, H.R. 1 Sec. 1309 of the Act repeals the deduction for alimony payments, also known as spousal support, in divorces effective January 1, 2019. It will not affect anyone […]
On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act. In an effort to pay for the tax cuts in the new law, H.R. 1 Sec. 1309 of the Act repeals the deduction for alimony payments, also known as spousal support, in divorces effective January 1, 2019. It will not affect anyone already paying or receiving alimony, but this change will have a significant effect on current and future divorcing couples, and will have a major impact on divorce proceedings. Prior to the enactment of the Tax Cuts and Jobs Act, alimony payments were tax deductible to the payor and included in the income of the recipient. Former spouses who pay alimony could deduct the expense from their federal income taxes and former spouses receiving alimony payments would have to claim the money as taxable income. Every dollar paid in alimony reduced the payor’s taxable income by the same amount. Under the new law, effective for divorce agreements and decrees on or after January 1, 2019, alimony payments are NOT deductible to the payor and NOT included in the income of the recipient. Alimony recipients will no longer need to report alimony as taxable income and those paying alimony will no longer be able to deduct the expense of the alimony payment from their federal income taxes. Unlike most provisions relating to individuals under the Act, the provision repealing the alimony deduction does not expire in 2026, the Act makes it permanent. The extra revenue the government stands to gain from the repeal of the alimony deduction, roughly $6.9 billion over a decade, based on Joint Committee of Taxation estimates, amounts to less than half a percent of the $1.5 trillion in estimated tax cuts. Legislators rationalized the repeal of the alimony deduction as eliminating what was effectively a ‘divorce subsidy’, where, it was felt that, under the current law, a divorced couple could obtain a better tax result for payments between them than a married couple, thus making the change in the tax law fair for married couples. But, since the main purposes of alimony are to allow both members of a divorcing couple to maintain a lifestyle as similar as possible to the lifestyle the couple enjoyed together during the marriage and to balance the economic consequence of divorce to prevent them from falling in disproportion on either spouse, the repeal of the alimony deduction is being seen by many as a divorce penalty. To the legislators who supported it, the elimination of the tax deductibility of alimony means that the government will no longer help support the spouse receiving the income. The spouse that receives alimony payments is typically a spouse who was financially dependent on his or her spouse throughout the marriage. This is usually the former wife, in the majority of divorces. The Census Bureau reports that 243,000 people got alimony last year, of that, 98 percent of them were women. The National Organization for Women and the American Academy of Matrimonial Lawyers opposed the change.
In New Jersey, N.J.S.A. 2A: 34-23(b) currently prescribes the statutory factors in determining spousal support/ alimony in the dissolution of a traditional marriage, civil union or same sex marriage, including the tax effects of payments. Many divorce experts predict that the change in the tax effects of alimony payments will make negotiations tougher and could lead to less spousal support as cash goes to taxes instead of dependent or lower wage earning former spouses. There is concern that the elimination of the alimony deduction will increase the financial strain of supporting an ex-spouse, lead to increased legal disputes and deprive a party in a divorce, who is financially less well off than their spouse, to income that is very much needed. Currently, in the majority of divorce cases where alimony is a factor, one party has a higher income and is in a higher tax bracket than the other party. After the divorce, the spouse paying the alimony is in the higher tax bracket and the spouse receiving the alimony payment is in a lower tax bracket. Currently, the difference between the tax brackets gives a benefit to the ex-spouse paying alimony and a greater benefit to the sex-spouse receiving it. In a divorce, under the current law, an attorney could negotiate divorces based on the tax impact of alimony. For example, assume a higher earning spouse (Spouse A) currently pays and deducts $30,000.00 a year in alimony. If Spouse A’s income is federally taxed at 33%, the deduction saves Spouse A $9,900 under the current law. Similarly, assume the lower earning spouse, (Spouse B) pays taxes on the alimony at a federally taxed rate of 15%, Spouse B pays $4,500.00 instead of the $9,900.0 which would be due at Spouse A’s higher tax bracket percentage rate. Spouse A and Spouse B together save $5,400 per year between them, the break to spouse A makes the alimony payments more affordable. This helps to compensate for the financial stress associated with divorce, for example, the added financial burden of maintaining two households. Under the new law, without the bargaining chip of the tax break to the spouse paying alimony, it is feared that the higher earning spouse will not pay as much to the lower earning spouse, having the leverage to argue for lower alimony. Current estimates are that, in the future, alimony recipients could receive 10-15% less in alimony than those who currently receive alimony.
Although no one cites tax reasons as the cause of their divorce, for those couples seriously contemplating divorce, there are significant tax advantages for couples to divorce before the end of 2018, when the repeal of the alimony tax deduction takes effect. Couples who are able to complete their divorce by year’s end will be keeping more of their money for the maintenance of their pre-divorce lifestyle and giving less of it to Uncle Sam.