Breaking up is difficult. But the GOP tax law could make it even more difficult, divorce lawyers say.
The final version of the tax plan, which was released on Friday and will be voted on next week, removes the tax deduction for alimony payments. Divorce lawyers say this move could make ending marriages an even more tedious and expensive process, and the change could be especially painful for lower-income couples.
Maintenance payments, which are usually codified in the terms of a divorce settlement, are separate from child maintenance. They are the payments someone makes to an ex-spouse who is making less money.
When the tax law goes into effect, the lifting of the alimony allowance would affect divorces that occurred after December 31, 2018. The new regulation would not affect people who are already paying alimony.
But it will mean big changes for divorce proceedings in the years to come.
At the moment, maintenance payments are tax-free for the payer and are taxed like normal income for the recipient. Since the recipient usually earns less money – and is therefore in a lower tax bracket – he keeps more money in the family and away from Uncle Sam.
The IRS says approximately 600,000 Americans claimed alimony deductions on their tax returns in 2015, the most recent year for which data is available.
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Divorce attorneys “use this tax deduction to make it easier to reach an agreement – because there was more money in the pot to separate them,” said New York-based divorce attorney Lisa Zeiderman. Without the deduction, “there is less money to get around,” she said.
Eliminating child support withholding can also have many spillover implications that make child support calculations and asset sharing more difficult, Zeiderman said.
That could make getting divorce settlements much harder – “which means more litigation, which means more money in terms of legal fees,” she said.
Christopher Melcher, a California-based divorce attorney, said the move could be especially difficult for lower-income couples.
Wealthy people can usually afford higher taxes on alimony, he said. “It’s the people with limited resources who make $ 200 or $ 300 a month a big difference in their lifestyle and quality of life. That’s a car payment, that’s meals.”
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Malcolm Taub, a Manhattan divorce attorney, agreed. Most of his clients are from the upper middle class and above. He doesn’t think abolishing the withdrawal will play a big role in the negotiations. “I don’t think this will be a big deal,” he said.
It’s not just future divorces that will be affected by the tax treaty – couples drafting prenuptial agreements should be careful, said Michael Beyda, another divorce lawyer based in New York.
He said pre-marital – and post-marital – agreements usually contain clauses outlining what the alimony would be in the event of the couple divorce. Up to this point in time, these clauses were usually drafted on the assumption that the maintenance tax deduction would be introduced.
CNNMoney (New York) First published on Dec. 15, 2017 at 7:22 p.m. ET
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