Contemplating Divorce? An Incentive to Finalize by Dec. 31

If you and your spouse are thinking about Divorce, and if there’s a likelihood that your Divorce will include an alimony payment, it’s time to get busy. Last winter’s GOP Tax Cuts and Jobs Act will eliminate a tax break for alimony payments finalized after Dec. 31.

Americans who finalize or modify Divorce agreements in 2019 or later will no longer be able to deduct alimony payments. The loss of the deduction has large financial implications for those couples where one partner earns substantially more per year than the other.

The breakdown: $1 of alimony is actually costing just 60 cents

What does the deduction mean for divorcing couples? For those in the highest income-tax bracket, it means that every dollar someone pays to support a former spouse is actually costing him/her a little more than 60 cents. Potential divorcees have the remainder of 2018 to use the alimony deduction as a bargaining chip in their negotiations with estranged spouses.

An increase in acrimonious Divorces that disproportionately target women

Many believe that removing this deduction will make Divorces more acrimonious, that people won’t be willing to pay as much alimony. More couples will end up fighting in court because they won’t be able to agree on alimony terms. Since it is women who tend to earn less and are most often the recipients of alimony, many believe this tax change could disproportionately hurt women. One family law attorney believes that the repeal reduces the bargaining power of vulnerable spouses, mostly women, in achieving financial stability after a Divorce.

For decades, alimony has been tax deductible

For decades, Americans paying alimony to a former spouse have been able to deduct the payments from their taxes. Depending on the size of the payments and the earning gap, they gave themselves a generous tax break. According to the IRS, an estimated 600,000 taxpayers claim this deduction each year. The Joint Committee on Taxation estimates that elimination of the tax break will increase federal revenues by $7 billion over the course of a decade.

There is evidence that some high-net worth clients are devising complicated workarounds in the event they cannot complete their agreements before the Dec. 31 date.

Leverage to negotiate lower spousal support in 2019

Divorce professionals expect that there will be less money for the spouse receiving alimony — or, at the very least, a major source of contention in negotiations between parties. ”The payer is going to have a lot of leverage to negotiate lower spousal support in 2019,” said Jeremy Runnels, a financial planner at West Coast Financial in Santa Barbara, Calif.

Couples looking beyond alimony to reach equitable solutions

Financial planners say some spouses may choose to forgo alimony payments and explore alternatives such as lucrative real estate, larger shares in tax-deferred retirement accounts or some complex combination of the two that maximizes tax advantages. Options include a Qualified Domestic Relations Order (QDRO) that sets up future payments to a lower-earning spouse from a higher-earning spouse’s retirement account, taxed at the lower earner’s rate.

We’ve assisted hundreds of couples with uncontested Divorce

If you and your spouse are in agreement about your Divorce—including division of property and a parenting plan–we can assist you and save a significant amount of money. Contact us at one of our three Bay Area offices to schedule an appointment. Our dedicated team is helpful, compassionate and affordable.