Some angry but for-profit couples are hoping to celebrate the New Year by making sure they finalize their divorce by December 31st.
The reason? Beginning in 2019, President Donald Trump’s tax reform will eliminate a lucrative tax break related to child support payments.
For couples looking to quit, the changes in tax rules could make it more appealing for some to divorce in 2018 rather than drag the process into 2019.
“As if there wasn’t enough controversy, we now have a time element,” said Gil Charney, a director of the H&R Block Tax Institute.
Divorce lawyers say they have been busy in the final months of 2018 as couples consider the new tax rules at mediation and divorce settlement conferences.
“I’ve been in mediation twice this week. I have two more next week,” Carol Breitmeyer, an attorney at Breitmeyer Cushman in Detroit, said in mid-December.
Think of this as tax-aware decoupling — where a couple tries to separate with as little tax damage as possible.
About 27 percent of CPA financial planners said they’ve seen an increase in the number of clients seeking to finalize their divorce before 2019, with 6 percent reporting a significant increase, according to the American Institute of CPAs’ 2018 Personal Financial Planning Trends Survey .
The ex-spouse paying alimony can no longer deduct these expenses unless the divorce settlement takes place before December 31st. It’s a big deal when you’re paying $30,000 a year or far more in spousal support and you’re in a higher tax bracket.
Child support payments were treated as a very favorable overage tax deduction that reduced your taxable income even before your Adjusted Gross Income was calculated. You can make deductions above the line even if you don’t provide any details.
Some even called the tax break a “divorce subsidy” for those who pay alimony.
“The government has decided to get out of the maintenance business,” Charney said.
What happens to the maintenance?
Beginning Jan. 1, those who are divorcing and paying alimony will no longer be able to claim a federal income tax deduction on the alimony they pay — ending a decades-long practice, Charney said.
Some ex-spouses who pay alimony may be talking about paying thousands of dollars more in federal income taxes if they delay the divorce process until 2019.
Consider this simplified example: Suppose the taxpayer earns $100,000 and pays $20,000 in child support.
In this example, the alimony payer could end up paying $4,472 more in federal taxes if the divorce isn’t resolved before 2019, Charney said. That’s because the $20,000 in child support payments would no longer be deductible and would be treated as taxable income.
To limit the impact of the alimony deduction, he said, the example assumed that the ex-spouse paying the alimony had no other income or deductions; and the spousal payments are considered alimony for federal tax purposes, not child support.
The tax regulations on child support will not change. Child support payments are not tax deductible by the payer and are not considered taxable income by the receiving parent.
Who still gets deductions?
Important to know: For many people who already pay or receive maintenance, the tax regulations will not change. Your maintenance payments would still be deductible; alimony received would continue to be reported as taxable income. (To claim alimony on a payment, the payer’s statement must include the social security number of the ex-spouse receiving the payments.)
Lisa Featherngill, a member of the American Institute of CPAs, warned that divorced couples should be extra cautious about making changes to existing arrangements to ensure tax breaks stay in place.
However, the huge change directly impacts new divorces settled in 2019 and beyond.
Featherngill, head of legacy and wealth planning at Abbot Downing in Winston-Salem, North Carolina, said she spoke to her own brother-in-law to make sure he finalizes his divorce by Dec. 31.
“We had this conversation for Thanksgiving,” Featherngill said.
“Alimony is a painful thing and the only thing that makes it a little less painful is that it’s tax deductible,” she said.
The new rules are part of the Tax Cuts and Employment Act passed in December 2017. Some didn’t understand the implications of the change; others simply continued to hesitate.
If you can wait until the last minute to buy Christmas gifts, you’ll also find a million reasons to delay a divorce, even if an accountant suggests otherwise.
“As you can imagine, there is tension,” Charney said. “It’s dangerous for a tax professional to get involved.”
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What happens to the maintenance recipients?
Pinning a divorce by December 31 means that the ex-spouse who is receiving alimony, who is often in a lower tax bracket, would still have to claim the money as taxable income.
However, delay until January or later and alimony received will no longer be counted as taxable income.
As a result, a recipient of alimony could have an incentive to delay finalizing a divorce until 2019, leaving the alimony essentially tax-free for the person receiving it.
“It’s become a big part of the negotiation,” said Matthew Caplan, partner at DAWN, women’s divorce attorneys at Bingham Farms.
“Obviously, there are two sides to the coin,” Caplan said.
Caplan said he would go to court the week before Christmas simply because the dependent spouse wanted to expedite the process for tax reasons.
But Caplan’s client, who will receive child support, is in no hurry, in part because of the tax benefit of a delay until January. There are other reasons, he said, for not closing this case now.
What to expect in the last minute rush
In Michigan, it’s impossible to just file for divorce, say, after a heated argument around the holidays, and expect the divorce to be finalized by the end of the year. By law, it takes at least 60 days to finalize a divorce from the date it began.
Much of this year-end tax rush will affect couples who began the divorce process months ago. In Michigan, Caplan said, most divorce cases are settled out of court rather than in court.
But even couples who are already stressed out about an impending divorce shouldn’t panic.
Divorce attorney Mary Anne Noonan, whose Royal Oak law firm is called FasTrackDivorce, said arbitrators will make adjustments based on the new tax rules to reflect the changes when resolving divorces in 2019 and beyond.
It’s possible that a $2,000 monthly child support payment under the old rules could be negotiated to about $1,650 in 2019, depending on your tax bracket. However, remember that the person who settles in 2019 and receives the alimony does not have to report this money as income nor pay taxes on it.
“It kind of comes out in the wash,” she said.
Nevertheless, Noonan acknowledged that there are now some cases where it makes sense to also take the new tax rules into account. She has a client whose husband wants to settle down in December.
But the client is a preschool teacher who would receive about $3,500 a month or $42,000 a year in child support. The alimony payments, if taxable under the old rules, would push them into a much higher tax bracket in 2019, Noonan said.
“It’s better for them to wait until January,” Noonan said.
Not every divorce involves alimony. State laws differ when it comes to spousal support.
For many people going through a divorce, alimony has been a useful tool to reach a settlement and avoid litigation, said David Stolz, a chartered accountant in Tacoma, Wash. and a member of the American Institute of CPAs.
“Soon that will change,” he said in a statement.
In the future, the alimony part of the equation will shift, and experts say many women receiving alimony could be negatively impacted.
“It will change the amount paid. It will be less,” said Breitmeyer.
Because if you stop receiving tax breaks, your actual alimony costs will increase from divorces settled in 2019.
As a result, some alimony spouses might even have an incentive to finalize a divorce in 2018 if possible. At least, lawyers and others agree that that can be part of the negotiations.
It’s important to realize, Breitmeyer said, that couples can’t sort out one part of the divorce, like alimony, without sorting out other issues.
In general, alimony has often been part of divorces that involve a long-term marriage, say more than 15 years, and a marriage in which one spouse has a significantly higher income than the other, Breitmeyer said.
“It’s really about the income gap, the length of the marriage,” she said.
But, she added, all sorts of circumstances can come into play where alimony could come into play, such as a spouse in very poor health or someone unable to support themselves. Alimony payments depend on the facts and circumstances of the marriage.
The ability to get a tax break on living expenses has made the payout more palatable for some high earners.
“It was a very nice little loophole that got plugged up,” Breitmeyer said.
Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow Susanne on Twitter.
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