Tax bill scraps break for alimony

To help pay for sweeping tax cuts, the GOP’s Tax Cuts and Jobs Act includes a provision that would scrap the break divorcees get for paying alimony.

If section 1309 of the tax bill becomes law, financial planners and divorce lawyers say the result could hurt all but the uber-wealthy.

“I’m just praying this does not go through,” said Jacqueline Newman, a New York divorce attorney at Berkman, Bottger, Newman & Rodd. “For many people in different income brackets, this is going to be horrible.”

Right now, every dollar in alimony reduces the payer’s taxable income by the same amount. Critics say getting rid of the deduction would not only increase the financial strain of supporting a former spouse but could also lead to more legal disputes and deprive the less-well-off party of much-needed income. Historically, men have paid alimony to women.

And while the change is likely to affect a large swath of Americans, the extra revenue the government stands to gain — roughly $8 billion over a decade based on one estimate — amounts to little more than a rounding error relative to the $1.4 trillion of tax cuts House Republicans are proposing.

“Taking that financial sweetener away makes it tougher for the payer to agree and honestly it just leads to higher lawyer bills to litigate the issue,” said Chris Chen, treasurer of the Association of Divorce Financial Planners. “It is going to make life miserable for hundreds of thousands of people.”

About 800,000 American couples called it quits in 2015, a rate of about a 100 divorces every hour, figures from the National Center for Health Statistics showed. While divorce rates have dropped among younger adults in the past quarter-century, those among older married couples have risen, according to the Pew Research Center. For those over 50, divorce rates doubled.

“It doesn’t necessarily dissuade anyone from getting a divorce but does mean both sides could be worse off,” said Justin Miller, national wealth strategist at BNY Mellon Wealth Management.

Tax breaks such as the alimony and mortgage-interest deduction, which is also being limited by the House bill, are critical to many divorced families trying to make ends meet, said Manhattan divorce lawyer Michael Stutman.

“Particularly in New York, you have a lot of couples who are barely keeping one house together with their income and now they’ve got to do two,” he said. “It is such a devastating economic event for most families.”

Eliminating tax benefits could “cost them another $4,000 or $5,000 a year,” Stutman said.

Of course, the bill only applies to couples who divorce after 2017 and alimony recipients would no longer need to report the benefit as taxable income.

Yet as with all tax bills, almost everything is up for negotiation. Kevin Brady, the chief House Republican tax writer, has already said more revisions may be coming. Sen. John Cornyn, R-Texas, said the chamber’s tax-writing committee wouldn’t be using the House bill as a starting point.

“It’s a long, long road,” said Miller. It’s “more likely a negotiating position. For now, we’re telling people not to panic.”