NEW YORK – The huge congressional tax reform will hit virtually every corner of American life – even Splitsville.
Republicans handed their comprehensive plan to a jubilant President Donald Trump, who signed it on Friday. One provision removes a 75 year old tax deduction for maintenance payments. The new rules do not affect anyone who gets divorced or signs a separation agreement before 2019.
Many divorce experts fear the change will make negotiations more difficult and result in less spousal support, as cash will go into taxes instead. Congressional tax writers say it is only fair to married couples.
A look into the details:
What changes? How does it work now?
In the event of a divorce that began after December 31, 2018, the dependent spouse cannot deduct it and the spouse who receives the money no longer has to pay taxes on it. Now it’s the other way around.
Divorce lawyers say the current facility tends to save more money overall to share between the spouses, which helps them afford a separated life.
“This was something that was very helpful in resolving divorce cases,” says Jef Henninger, a New Jersey marriage attorney.
Show me the math?
Imagine if high-earning spouse A is now paying and deducting $ 30,000 in maintenance annually. Spouse A’s income is taxed at 33% federal tax, so the deduction saves him $ 9,900.
The lower-income spouse B owes 15% alimony tax and pays $ 4,500 in lieu of the $ 9,900 that would be due at Spouse A’s rate. The two together saved $ 5,400, and Spouse A was given a break that makes payments more affordable.
Tom Leustek estimates that the deduction will save him about 5,000 US dollars a year – “not an insignificant amount for me,” says the plant biology professor from New Jersey.
“The person who actually gets the money should be the one who pays taxes on it,” he says.
How many people even get maintenance?
Government statistics vary. According to the Census Bureau, 243,000 people received maintenance last year, 98% of them women. According to the Internal Revenue Service, 361,000 taxpayers reported receiving a total of $ 9.6 billion in child support in 2015, although only 178,000 reported receiving spousal child support. (The rift has annoyed the government for years; the IRS said in 2014 that it is improving its strategies for dealing with the discrepancies.)
Child support payments are segregated, and over 4.3 million people received them last year, according to the census figures. Some divorces involve child support and child support.
The divorce rate in the United States peaked in the early 1980s and has steadily declined since then. According to federal statistics, more than 813,000 couples divorced across the country in 2014.
What are the arguments for the change?
The House Ways and Means Committee, which drafts the tax bill, calls the alimony allowance “divorce allowance”.
“A divorced couple can often achieve better tax returns than a married couple on payments between them,” the committee noted last month.
The panel also argued that alimony should be treated like child support, which is not taxable for either the payer or the recipient.
The non-partisan mixed tax committee of Congress estimates that lifting the withholding will generate $ 6.9 billion in new tax revenue over a 10-year period. That’s less than half a percent of the $ 1.5 trillion tax cut plan.
What are the concerns?
Critics fear that without the deduction, higher-income spouses wouldn’t pay as much to their ex. New York marriage attorney Malcolm S. Taub estimates that future dependents will lose 10 to 15% of what they would receive under applicable law.
Lawmakers “take money from people who have been through the trauma of divorce, and they take money from people during one of the worst times of their lives,” he says.
Some marriage contracts contain maintenance provisions that require tax withholding, said Scott Swier, a South Dakota attorney. Some states may need to change the maintenance guidelines set out in their laws.
The National Organization for Women and the American Academy of Matrimonial Lawyers rejected the change. Boston-based family law attorney Regina Snow Mandl was concerned enough to send her clients an email notification. Massachusetts marriage attorney Wendy Hickey says she takes calls from clients who are “in a panic and want to get everything done,” although the pressure has eased since lawmakers postponed the entry into force to 2019.
Regarding the argument “divorce subsidy”, Mandl replies: “I have never heard of a married couple that they are getting divorced for tax reasons.”
Still, Association of Divorce Financial Planners President Cheryl Glazer notes that alimony is just one factor in determining how a particular future divorce will fare at tax time.