Consider tax reform in alimony discussion
QMy wife and I have been negotiating our divorce for several months. We are just finalizing a few points, including how much alimony I will pay. We had been op- erating under the assumption that I would have to pay her at least 33 percent of my gross income (she doesn’t work). But then the Young case was decided, and the lawyers started negotiating a reduced amount to cover my wife’s true needs.
I am getting worried that the tax reform will pass and I will not be able to deduct my alimony payments at all. That would cost more than the 33 percent order we were previously discussing. Should I put a rush on the negotiations?
AYour question assumes what lawyers refer to as a “fact not in evidence.” The proposed new law would mean that, starting with divorces that occur after Jan. 1, 2018, alimony payments would no longer be permitted as a deduction that reduced the payor’s income.
Currently, when a taxpayer in the highest tax bracket pays alimony to a spouse, the spouse, who will usually be in a lower tax bracket, will pay less tax on that income. So now “Uncle Sam” chips in to pay part of that alimony. But most of the time with the “tax effect” — where the payor doesn’t pay tax on the alimony, but the payee does — the tax savings is divided between the parties.
So the payee ends up with more after-tax money that helps pay bills and do more for the children. The presumption is, as with many government programs, that the more the children are helped when young, the more money they will earn. In turn, over the long run, state and federal governments end up with more taxes. That’s what happened when the so-called U.S. government GI Bill gave World War II veterans money to attend college. Those veterans earned degrees and — over their lifetimes — paid far more in taxes than they’d otherwise have paid. That’s a win-win.
Meanwhile, this past Tuesday, I read that the attempt to cut deductions for alimony was cut out of the current bill. Even though we don’t know what will be in the final law, don’t panic. If your wife believes you want to get the divorce done before Dec. 31, she may make
higher demands, hoping you’ll cave in. Instead, make two offers. One offer is the alimony and child support numbers if the divorce is granted before Dec. 31. The other is the amount to be paid if the law is passed and impacts divorces settled after Dec.31.
Seeing that her net after-tax income will be more if she settles now ought to be a strong incentive for her to get on the same train you’re riding toward a Dec. 31 divorce.
Wendy O. Hickey has since 1994 been involved in and since 2003 been a trial lawyer who concentrates her practice on national and international family law. Any legal advice in this column is general in nature, and does not establish a lawyer-client relationship. Send questions to dearwendy@bostonherald.com.