The 2017 GOP tax overhaul eliminates the deduction for alimony payments in divorce agreements entered into after Dec. 31, 2018. That means beginning next month, tax savings for many divorcing couples will be smaller than they are now.
Divorce lawyers and financial planners say they are racing to have couples complete their agreements before the changes take effect.
Twenty-seven percent of Certified Public Accountant (CPA) financial planners have seen an increase in the number of clients aiming to finalize their divorces this year, with 6 percent reporting a substantial increase, according to survey results released Thursday by the American Institute of CPAs.
“It is a complete madhouse,” said Jacqueline Newman, managing partner at Berkman Bottger Newman & Rodd in New York.
She said her firm has been scheduling closings in cases where all the terms of a settlement haven’t been agreed to yet.
About 586,000 tax returns claimed the alimony deduction for the 2016 tax year, according to IRS data. And around 164,000 of those were from people with income between $100,000 and $200,000.
The 2017 tax law significantly changes the way alimony payments are treated in the U.S. tax code.
The person paying alimony has been permitted to deduct those payments, reducing their tax bill in the process. The alimony recipient, who typically is in a lower bracket, would then report the payments as income.
Under the new law, the alimony payer can no longer deduct the payments, and the recipient no longer has to pay taxes on them. The tax change applies not only to divorce and separation agreements executed after 2018, but also to some modifications to existing agreements made after Dec. 31.
Eliminating the alimony deduction is one of the changes congressional Republicans made to help pay for other tax cuts in last year’s massive tax overhaul bill. The Joint Committee on Taxation estimated that including the alimony provision would raise $6.9 billion from fiscal 2018 to fiscal 2027.
A senior House aide said the change was made to align the tax treatment of alimony with that of child support. The aide also said lawmakers decided to make the deduction elimination effective starting in 2019, rather than in 2018, so that it wouldn’t interfere with agreements made late last year.
Trump signed the measure into law on Dec. 22, 2017.
Tax policy experts see a rationale for eliminating the deduction.
Joseph Rosenberg, a senior research associate at the Urban-Brookings Tax Policy Center, said the change is a “simplification” of the tax code, since there were rules about what counted as tax-deductible alimony.
He also said it’s reasonable to have the money taxed at the rate of the person who earned it.
Nicole Kaeding, director of federal and special projects at the Tax Foundation, said that under the pre-2019 system, couples in different tax brackets have been receiving a “slight tax savings” for being divorced. That’s because if a couple remained married they would be paying taxes at a higher rate than the spouse receiving alimony was paying after the divorce.
Lawyers, however, say eliminating the deduction is a significant change in family law that will result in divorcing couples having less post-tax money to divvy up.
If the spouses are in different tax brackets, more money is going to the federal government in the form of taxes for divorces finalized in 2019 and beyond because the alimony will be taxed at the higher-earning spouse’s rate.
In some cases, alimony recipients could end up benefiting from the change because they won’t have to pay taxes on the payments. However, recipients could also end up receiving less in alimony because of the change.
Attorneys say they have used the alimony deduction as a negotiating tool to help get the lower-income spouse more money.
“Without that bargaining chip, we’re not going to be able to negotiate as much in terms of spousal support amounts,” said Monica Mazzei, a partner Sideman and Bancroft in San Francisco.
The change could also lead to courts awarding less alimony to the lower-earning spouse.
“I think the loss of deductibility will have the courts reconsider how they’re determining the amount of support, and then there would be a lesser amount paid to a recipient,” said Alan Plevy, a family law attorney at SmolenPlevy in Vienna, Va.
With just about two weeks until the deduction’s elimination, divorce lawyers say they’re working around the clock to revolve their clients’ cases.
“Across the country, divorce lawyers are extremely busy,” said Peter M. Walzer, president of American Academy of Matrimonial Lawyers. “People want that deduction.”
Lawyers noted that they’re not seeing people seek out divorces solely because of the tax change, though couples who have already started the process are pushing to complete it.
“It’s causing all of us to try to schedule more mediations and settlement conferences to try to reach a resolution before the end of the year,” said Lisa Angel, an attorney with the Rosen Law Firm in Raleigh, N.C.
She said she normally doesn’t schedule mediations the week before Christmas, but this year she made an exception and now has several on her calendar.
And some higher-earning spouses are willing to offer to pay more to get their business taken care of before 2019.
People are being more generous “because of the desperate feeling of having to get this done,” Newman said.
