How the tax revision would change little one assist funds

NEW YORK — Congressional tax reform giant is poised to hit virtually every corner of American life — even Splitsville.

Republicans handed their sweeping plan to a jubilant President Donald Trump, who signed it into law on Friday. One provision scraps a 75-year-old child support tax deduction. The new rules will not affect anyone who divorces or signs a separation agreement before 2019.

Many divorce experts fear the change will complicate negotiations and result in less spousal support as the money goes to taxes instead. Congressional tax writers say it’s only fair to married couples.

A look at the details:

What changes? How does it work now?

In a divorce that begins after December 31, 2018, the spouse paying alimony cannot deduct it, and the spouse receiving the money no longer has to pay tax on it. Now it’s the other way around.

Divorce attorneys say the current setup tends to save more money overall that can be split between spouses and help them afford separate lives.

“It was very helpful in resolving divorce cases,” says Jef Henninger, a New Jersey matrimonial attorney.

show me the math

Imagine high-earning Spouse A now pays $30,000 in alimony and deducts it. Spouse A’s income is taxed at a federal rate of 33%, so the deduction saves him $9,900.

Spouse B, with a lower income, owes alimony tax at a rate of 15% and pays $4,500 instead of the $9,900 that would be due at Spouse A’s tax rate. The two have saved $5,400 together, and Spouse A is on a break that makes the payments more affordable.

Tom Leustek estimates that the deduction saves him about $5,000 a year — “not an insignificant amount to me,” says the New Jersey-based plant biology professor.

“The person who actually receives the money should be the one who pays taxes on it,” he says.

How many people actually get alimony?

Government statistics vary. The Census Bureau says 243,000 people received child support last year, 98% of them women. According to the Internal Revenue Service, 361,000 taxpayers reported paying alimony totaling $9.6 billion in 2015, although only 178,000 reported receiving spousal support. (The gap has angered the government for years; the IRS said in 2014 it was improving its strategies for dealing with the discrepancies.)

Child support payments are separate, and over 4.3 million people received them last year, census figures show. Some divorces involve alimony and child support.

The US divorce rate peaked in the early 1980s and has continued to decline ever since. According to federal statistics, more than 813,000 couples divorced nationwide in 2014.

What are the arguments for the change?

The Tax Writing House Ways and Means Committee refers to the alimony deduction as a “divorce grant.”

“A divorced couple can often achieve a better tax outcome on payments between them than a married couple,” the committee noted last month.

The panel also argued that alimony should be treated like child support that is already not tax deductible for the payer or taxable for the recipient.

The bipartisan Congressional Joint Committee on Taxation estimates that removing the deduction will generate $6.9 billion in additional tax revenue over 10 years. That’s less than half a percent of the $1.5 trillion tax cut plan.

What are the concerns?

Critics fear that better earning spouses will not pay their ex as much without the deduction. New York marriage attorney Malcolm S. Taub estimates that future dependents will lose 10% to 15% of what they would receive under the current law.

Lawmakers “take money from people who’ve suffered the trauma of divorce, and they take money from people at one of the worst times in their lives,” he says.

Some prenuptial agreements have alimony provisions that handle the tax withholding, said Scott Swier, a South Dakota attorney. Some states may need to change the child support guidelines enshrined in their laws.

The National Organization for Women and the American Academy of Matrimonial Lawyers opposed the change. Boston-based family law attorney Regina Snow Mandl was concerned enough to send clients an email alert. Massachusetts marriage attorney Wendy Hickey says she’s taking calls from clients “panicked who want to get everything done,” though the pressure has eased since lawmakers pushed the effective date to 2019.

Regarding the “divorce subsidy” argument, Mandl replies: “I’ve never heard a couple say they’re getting divorced for tax reasons.”

However, Association of Divorce Financial Planners President Cheryl Glazer notes that child support payments are just one factor among many that will determine how any particular future divorce fares at tax time.

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