Tax code changes cre­ate rush to fi­nal­ize di­vorces

Who wins in split? Feds, who’ll get more revenue

USA TODAY Weekend Extra - - NEWS - David McKay Wil­son

There’s a rush to nail down di­vorce deals by New Year’s Eve.

Af­ter that, di­vorcees in 2019 will help fund tax cuts for cor­po­rate Amer­ica that were en­acted by the 2017 Trump tax re­form.

On Jan. 1, al­imony will no longer be tax-de­ductible by the spouse mak­ing those pay­ments. At the same time, the re­cip­i­ent of what’s called spousal main­te­nance will no longer de­clare those pay­ments as tax­able in­come.

This pro­vi­sion will shrink the amount of money avail­able for the split-up house­holds be­cause taxes will rise sig­nif­i­cantly for the spouse mak­ing the al­imony pay­ments.

The spouse re­ceiv­ing the pay­ments, mean­while, could see a wind­fall un­der the new rules be­cause the pay­ments will no longer be tax­able on Jan. 1.

“The pres­sure is huge,” said mat­ri­mo­nial at­tor­ney Lisa Zei­der­man, man­ag­ing partner at Miller, Zei­der­man & Wiederkehr of White Plains, New York. “Once the tax de­duc­tion is gone, there will be less money for the fam­ily unit. I’ve had emails and calls all morn­ing from peo­ple who would like us to ne­go­ti­ate and set dead­lines and put pres­sure, in some way, on their spouses, so we can get a deal done.”

How $100K pay­ment would work

The fed­eral tax treat­ment of al­imony dates back to the early 20th cen­tury. In 1917, the U.S. Supreme Court ruled that al­imony pay­ments were not tax de­ductible. But that changed in the 1940s, when IRS rules al­lowed spouses to deduct those pay­ments, said Jere Doyle, se­nior vice pres­i­dent of Bank of New York Mellon Wealth Man­age­ment.

The change ap­proved by con­gres­sional Repub­li­cans was needed to stem the loss to the fed­eral Trea­sury to $1.5 tril­lion over 10 years. Re­mov­ing the al­imony de­duc­tion will save $6.7 bil­lion – a pit­tance com­pared to al­most $700 bil­lion saved by the $10,000 cap on the de­ductibil­ity of state and lo­cal taxes.

The stakes are high. It’s not un­usual for high-end spouses to pay from $5,000 to $15,000 a month – or $60,000 to $180,000 a year in al­imony. A look at how the tax law would treat an­nual pay­ment of $100,000 in al­imony is in­struc­tive.

Let’s say the spouse pay­ing the al­imony earns $300,000 a year, and pays fed­eral taxes of 35 per­cent on any in­come earned over $200,000. Un­der cur­rent law, he can deduct the $100,000 that he pays in al­imony, which cuts his tax li­a­bil­ity by $35,000.

His wife would now pay taxes on the $100,000 in al­imony, but at a lower rate, with her taxes com­ing to just $17,000. It’s a way that fed­eral tax law has soft­ened the fi­nan­cial blow that di­vorce de­liv­ers when mar­riages dis­solve.

The Trump tax law elim­i­nated the tax break, so the IRS will re­ceive $35,000 in tax from the hus­band – and noth­ing from the wife. That means Un­cle Sam ends up with $18,000 more. That’s $18,000 less in joint in­come that the partners get to split up in the di­vorce ne­go­ti­a­tions.

“We try to cre­ate value in the mar­i­tal es­tate, with the shift in tax­able in­come from the higher-earn­ing spouse to the lower-earn­ing spouse, with the premise that there would be more money for ev­ery­one,” said at­tor­ney Ken Noven­stern. “All of a sud­den, that’s all go­ing away.”

With the lower-earn­ing spouse – typ­i­cally the wife – no longer hav­ing to pay in­come tax on al­imony pay­ments, her in­come would in­crease, if the hus­band still paid the same amount in al­imony.

But ad­vo­cates for women doubt that will oc­cur. They say the loss of de­ductibil­ity will com­pli­cate di­vorce ne­go­ti­a­tions, and could re­sult in women re­ceiv­ing less than they do now be­cause their spouses have less to give.

“The in­cen­tives for the monied spouse to be fair and gen­er­ous have now been re­moved,” said Rob­bie Sch­laff, di­rec­tor of Westch­ester County’s Of­fice for Women.

“Women will be fur­ther im­pov­er­ished,” pre­dicted Car­lla Hor­ton, ex­ec­u­tive di­rec­tor of Hope’s Door, a Westch­ester shel­ter for vic­tims of do­mes­tic abuse.


Lisa Zei­der­man, a lawyer in White Plains, N.Y., says lawyers are busy deal­ing with clients who want di­vorce pro­ceed­ings sped up be­cause of the changes that take ef­fect Jan. 1.

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