Tax break for alimony disappearing

A change in the new tax law will eliminate a tax break for alimony payments that are finalized after Dec. 31, prompting lawyers to warn wealthy clients to act now.

WASHINGTON — For the wealthiest Americans, there may never be a better time to get divorced.

A change in the new Republican tax law will eliminate a tax break for alimony payments that are finalized after Dec. 31, prompting financial planners to warn wealthy clients that if they have been contemplating filing for divorce, they better act fast.

Under the law, Americans who finalize or modify divorce agreements in 2019 or later will no longer be able to deduct alimony payments from their taxes. Agreements signed before the end of the year will still qualify for the annual deduction — a distinction with large financial implications for couples where one partner earns substantially more per year than the other.

“I have never wanted to counsel people, hurry up and get a divorce,” said Fern Frolin, a divorce lawyer in Boston whose clients often have high incomes. “But in this particular instance, we could be talking about 15 to 20 years of support, and shifting the tax burden for the last years of a person’s working life.”

For decades, Americans paying alimony to former spouses have been able to deduct the payments from their taxes, providing a potentially generous tax break depending on the size of the payments and the gap in earnings between spouses. About 600,000 taxpayers claim the deduction each year, according to the IRS.

Under the current system, the person paying alimony can deduct those payments — no matter how big — from their income before calculating what they owe in taxes. That deduction provides a significant benefit to the wealthiest Americans, whose top tax rate is 37 percent and would otherwise owe taxes on all of their income, including what they paid out in alimony. Right now, the rich disproportionately deduct alimony — about 20 percent of taxpayers who claim the deduction are in the top 5 percent of household income earners.

Eliminating the benefit will hit certain types of divorced couples harder, primarily hurting those who earn vastly different amounts of income and are taxed at different rates. Under the current code, if the person paying alimony earns substantially more than the former spouse, that person generally negotiates a higher payment because the payer can deduct the full amount, and the former spouse, who earns less, pays a lower tax rate on alimony payment. The new treatment takes away that benefit.

Lawyers warn that the loss of the alimony deduction could disproportionately hurt women, who are the more frequent recipients of alimony payments and who face a higher risk of income decline after divorce than men. It could also reduce the welfare of some children.

Child support payments are not deductible, but so-called unallocated support — payments that are meant to help a divorcing spouse and children at the same time — is deductible. That deductibility will also end for any new or modified divorce agreements, starting in 2019.