Change in upkeep tax turns funds in divorce negotiations the wrong way up

Divorced couples cut child support payments and instead transfer collateral to ex-spouses as they can no longer write off those payments, divorce lawyers say.

The new tax law has changed the treatment of alimony, so divorce lawyers are looking for creative ways to help their clients. Before 2019, the higher-income spouse could deduct these maintenance payments in the event of a divorce, while the lower-income recipient had to pay tax on them.

Now the higher-income spouse is excluded from the deduction of the benefit and the recipient can exclude him from taxable income. As a result, experts say these payments are shrinking.

“I use lower dollars and lower percentages,” said Linda Ravdin, divorce attorney at Pasternak & Fidis in Bethesda, Maryland in lieu of alimony? ‘”

This is exactly what many couples are exploring, she and others said. Whether the regulation works out better or worse for the recipient depends on the facts and circumstances. There can also be a transfer of the tax liability back to the recipient, who, for example, has to pay tax on dividends and capital gains on securities, she continued.

“In general, the payment amounts are lower,” said Hubert Klein, a partner at EisnerAmper LLP in Iselin, NJ who heads the company’s Financial Advisory Services group. “With the loss of tax deductibility, people want to make more asset transfers.”

Sales hit?

Simply bypassing the change has led some to suspect that the provision may not bring in as much sales as expected.

The Joint Tax Committee projected the provision would raise $ 6.9 billion between 2019 and 2027. An official familiar with the law’s revenue estimates said the forecast likely took into account resulting changes in divorce negotiations as all revenue estimates tried to take into account taxpayers’ reactions to the new law.

“It’s interesting how it’s been viewed as a source of income,” said Brandon Keim, tax litigation attorney and CPA at Frazer Ryan Goldberg & Arnold LLP in Phoenix, adding that recipient net sales tend to stay about the same. as they receive a smaller amount but no longer lose any part to the government.

Divorced couples without legal counsel can negotiate like they did a year earlier, but if lawyers are brought in they will be sure to consider the tax implications, he said.

Marriage contracts

Married couples who negotiated their divorce before the tax law change continued under the old regime, ie the payments are still deductible for the higher earner and taxable for the recipient. In fact, over the past year many rushed to finalize their agreements before the new rules came into effect.

But couples who negotiated prenuptial agreements prior to this year could find themselves in a bind in divorce negotiations, as those prenuptial agreements often have alimony caps based on deductibility, lawyers said.

“The person who advocated a lower limit will say, ‘Of course this should have been a lower amount because it should have been deductible,'” said Peter Walzer, founding partner of Walzer Melcher LLP in Los Angeles and president of American Academy of Matrimonial Lawyers. “There will be more litigation in marriage contracts because the agreement no longer makes sense under current law.”

This, in turn, could lead to further litigation.

“That will be a matter of the courts,” said Klein. “We are waiting for a lot of guidance on these issues.”

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