Why December 31 may be a good deadline for starting a divorce
This article looks at why the new tax reform law could inadvertently lead to a surge in divorce filings.
In December of 2017, Congressional lawmakers passed a sweeping tax reform bill called the “Tax Cuts and Jobs Act”. Contained within that law was something that could end up enticing many people who have been considering leaving an unhappy marriage to get started on divorce proceedings sooner rather than later. As PBS Newshour reports, the tax reform law eliminates a substantial deduction for post-divorce “maintenance” (a/k/a “alimoney”) for all divorces that are begun after December 31, 2018. Analysts say the elimination could lead to a rush for divorces before the end-of-year deadline.
Rushing for divorce?
As mentioned above, the “Tax Cuts and Jobs Act” cuts the post-divorce maintenance/alimony deduction for divorces begun at the start of 2019 onwards. That means that anybody who wants to take advantage of the deduction will have to either sign a post-marital agreement or file for divorce prior to the end of 2018. Furthermore, once the alimony deduction is eliminated, those receiving alimony will no longer have to pay federal income taxes on those payments.
While it is yet to be seen whether the elimination of the alimony deduction will actually lead to a rush for divorce, the deduction is an important negotiating tool in many divorce cases. That’s because those in the highest tax bracket only have to pay 60 cents on every dollar they spend in alimony once they get their deductions back. As a result, those paying post-divorce maintenance/alimony rely on the deduction to give them some flexibility in negotiating payments.
Recipients likely to receive less
The elimination of the deduction would seem to hurt those paying alimony more than those receiving it, who currently are taxed on those payments. However, as Politico points out, the reverse could in fact be true. That’s because recipients of alimony tend to be in a lower tax bracket than those paying alimony. As a result, what recipients pay in taxes on their alimony payments tends to be less than what the payer is able to deduct. In turn, that means that the payer is able to afford larger alimony payments, something that ultimately benefits the recipient. Once the alimony deduction is eliminated, a greater share of the alimony payments will in effect go to the federal government despite the fact that recipients will no longer be paying taxes on those payments.
There are also concerns about how the elimination of the tax deduction could affect other areas of divorce. For example, prenuptial agreements that were agreed to under the presumption that alimony would be tax deductible could now prove less beneficial for one spouse and may need to be renegotiated. Also, the fact that those paying for alimony will no longer be able to deduct payments means that divorce negotiations themselves are likely to become more divisive because there will simply be less money available to divide.
Divorce law help
As mentioned above, those who are considering divorce have until December 31, 2018 to begin the process and thus potentially take advantage of the soon to be eliminated alimony deduction. The above article is also a reminder of why it is so important for anybody going through a divorce to have an experienced Board-certified family law attorney, who can help clients advocate for their best interests, including by negotiating a divorce settlement that can help them to thrive in their post-divorce lives.