- Attorneys and other divorce professionals are struggling to understand the tax changes.
- They worry about everything from messy breakups to fewer women contributing to their retirement.
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Determining alimony has always been difficult for divorce attorneys, mediators, and couples trying not to be a couple.
Thanks to the new tax code, it will be even harder.
In recent years, a large part of the alimony pain has come from the fact that each state has its own set of rules. These determined how high the maintenance payments should be and when these payments should end.
“There’s not really a coherent rationale for alimony,” said Mary Kay Kisthardt, law professor at the University of Missouri-Kansas City School of Law. “In any given state, we’re not sure what we’re trying to do.”
For the past 75 years, however, one rule has been clear: alimony payments were deductible for the payer, and the recipient paid income tax on them.
The new law brings disruption to those working through divorces — and those going through it, experts say, turning that constant on its head in a highly subjective area of law. Under the Tax Reduction and Employment Act, for all divorces after December 31, 2018, the payer’s alimony is no longer deductible and the recipient does not have to pay tax on it.
Lawyers strive to understand and respond.
There isn’t really a coherent justification for alimony payments.
Mary Kay Kisthardt
Professor of Law at the University of Missouri-Kansas City School of Law
Justin Reckers, a certified divorce financial analyst in California, said judges and attorneys in the state use specific software to calculate alimony payments. This system is now unusable.
“These policies rely heavily on tax laws,” Reckers said.
As a result, he predicts divorces could get messier. Offering tax breaks to alimony payers, he said, often helps move negotiations forward.
“It’s a lost tool for settling cases outside of the court system,” he said. “Perhaps more cases will go to court now.”
Tom Leustek, founder of the New Jersey Alimony Reform advocacy group, said he was shocked by the change. Shortly after the bill was passed, he wrote a report on its possible implications and sent it to the office of New Jersey Governor Phil Murphy.
“The two households that came about simply through a divorce cannot work as cheaply as the single household of an intact family,” it says there. “The current tax structure that helps alleviate those burdens has now been eliminated.”
We can’t afford to get a divorce without that tax benefit, so we’re going to stay together, and I don’t mean happily.
Ken Neuman
Center for Mediation and Training in New York City
Under the old code, one household income receive Divorce tax breaks because the higher-paid earner (usually with the heavier tax burden) transfers the income to the lower-paid spouse (who often has a less taxing tax rate).
Some people could now afford a divorce less, said Ken Neumann, director of the Center for Mediation and Training in New York City.
Such couples, he said, might argue, “We can’t afford to divorce without that tax benefit, so we’re going to stay together, and I don’t mean happily.”
Neumann said he received calls from confused intermediaries.
“They ask, ‘What’s going to happen? Are we going to negotiate differently?’ We don’t know the law,” he said.
On the face it looks like it would benefit women.
Ken Neuman
The uncertainty about the new laws is already causing problems.
Reckers said child support recipients called and asked if they should change their existing child support agreements to comply with the new tax law – so they no longer have to pay tax on it. He warned her: Don’t take this as a stroke of luck.
For one, experts say it’s still unclear whether existing maintenance agreements that were amended in 2019 would be subject to the new rules. Regardless, the changes are likely to result in less money for the recipient, since the payer “has less money to pay without the deduction.”
Neumann provided a hypothetical example. A man who makes $500,000 a year and is in the top tax bracket pays his wife $100,000 a year in child support — but it only costs him about $50,000 after the tax break. The ex-wife gets the $100,000 but is left with $75,000 after taxes.
Now, Neumann said he could see many cases where the ex-husband would argue that he could only afford $50,000, and the ex-wife would be left with $50,000 a year — or $25,000 less.
(The majority of child support payments are made by men, although the proportion of women has increased).
“It looks like this on the face [the new law] will benefit women,” Neumann said.[But] she will take the biggest hit.”
You used to be able to give people an idea. Well, we don’t really know.
Heidi Webb
Founder of Consilium Divorce Counseling
Aside from receiving less money, the dependent can also find it more difficult to contribute to a retirement account, as these contributions often have to come from taxed income.
“That’s not going to be money to put in an IRA,” said Madeline Marzano-Lesnevich, president of the American Academy of Matrimonial Lawyers.
Many couples will rush to finalize their 2018 divorces to avoid the new tax problems, he said Heidi Webb, attorney and founder of Consilium Divorce Consultations in Lincoln, Massachusetts.
“A lot of questions were raised,” Webb said. “You used to be able to give people an idea. Now we don’t know for sure.”
“People are already so vulnerable during a divorce,” she said. “That makes it all worse.”
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