Upkeep tax deduction ends in 2019: that is what it means

Some angry but bottom line couples are hoping to celebrate the New Year by making sure they complete this divorce by December 31st.

The reason? Beginning in 2019, President Donald Trump’s tax revision will remove a lucrative tax break related to alimony.

For married couples who want to call it over, the changes in tax rules could make divorce more attractive to some in 2018 rather than postponing the process to 2019.

“As if there weren’t enough arguments, we now have an element of time,” said Gil Charney, director of the H&R Block Tax Institute.

Divorce attorneys say they were employed in the final months of 2018 as couples consider the new tax rules at mediation and divorce conferences.

“I’ve been to mediation twice this week. I’ll have two more next week,” said Carol Breitmeyer, attorney at Breitmeyer Cushman in Detroit, in mid-December.

Think of this as tax-conscious decoupling – where a couple tries to part with the least tax damage possible.

Around 27 percent of CPA financial planners said the number of clients looking to finalize their divorce before 2019 has increased. 6 percent reported a significant increase, according to the American Institute of CPAs’ 2018 Personal Financial Planning Trends Survey.

The ex-spouse who pays alimony cannot deduct these costs unless the divorce settlement is made before December 31st. It’s a big deal when you’re paying $ 30,000 a year or far more in spousal benefits with a higher tax bracket.

Alimony was treated as an extremely cheap, over-the-line tax deduction that reduced your taxable income even before your gross adjusted income was calculated. You can make over-the-line deductions even if you don’t list.

Some even called the tax break a “divorce grant” for those who pay child support.

“The government has decided to get out of the maintenance business,” said Charney.

What happens to maintenance?

As of Jan. 1, those who divorce and pay child support will no longer be able to make federal tax deductions on child support they pay – ending a decade-long practice, Charney said.

Some child support ex-spouses could talk of paying thousands of dollars more in federal income taxes if they drag out the divorce process through 2019.

Consider this simplified example: suppose the taxpayer makes $ 100,000 and pays $ 20,000 in maintenance.

In this example, the ex-spouse who pays child support could end up surrendering $ 4,472 more in federal taxes if the divorce isn’t resolved until 2019, Charney said. This is because the $ 20,000 child support payments are no longer deductible and are treated as taxable income.

To examine the effects of the alimony deduction, the example assumed that the ex-spouse paying the alimony had no other income or deductions. and spouse payments are deemed to be child support for federal support purposes and not child support.

The tax rules for child benefit will not change. Child support payments are not tax deductible by the payer or are taken into account as taxable income by the parents who receive these child support payments.

Who else gets a deduction?

One important point to know: Tax rules will not change for many people who already pay or receive maintenance. Your maintenance payments would still be deductible. Maintenance payments would continue to be reported as taxable income. (To apply for alimony allowance for a payment, the payer’s return must include the Social Security number of the ex-spouse who is receiving the payments.)

Lisa Featherngill, a member of the American Institute of CPAs, warned that divorced couples want to be extra careful about changes to existing agreements to ensure that tax breaks remain in place.

However, the tremendous change is having a direct impact on new divorces settled in 2019 and beyond.

Featherngill, director of legacy and fortune planning at Abbot Downing in Winston-Salem, North Carolina, said she spoke with her own brother-in-law to make sure he had resolved his divorce by December 31.

“We had this conversation for Thanksgiving,” said Featherngill.

“Maintenance is a painful thing and the only thing that makes it a little less painful is that it’s deductible,” she said.

The new rules are part of the law on tax cuts and jobs passed in December 2017. Some did not understand the implications of the change. others just hesitated.

If you can wait until the last minute to shop for Christmas gifts, you can also find a million reasons to postpone a divorce even if an accountant suggests otherwise.

“As you can imagine, there is tension,” said Charney. “It is dangerous for a tax advisor to get in the way.”

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What happens to those who receive support?

Getting a divorce by December 31st means that the ex-spouse who is receiving maintenance and who is often in a lower tax bracket would still have to claim the money as taxable income.

However, a delay until January or later and alimony payments are no longer considered taxable income.

As a result, a recipient of alimony could have an incentive to postpone the conclusion of a divorce until 2019 so that alimony is essentially treated as tax-free for the person receiving it.

“It’s become an important part of the negotiation,” said Matthew Caplan, partner at DAWN, divorce lawyers for women at Bingham Farms.

“Obviously there are two sides to the coin,” said Caplan.

Caplan said he would go to court the week before Christmas only because the spouse who has to pay child support wants to speed up the process for tax reasons.

But Caplan’s customer, who will receive maintenance, is reluctant to rush through, in part because of the tax benefit of a delay until January. There are other reasons, he said, not to close this case now.

What to expect at the last minute

In Michigan, it is impossible to simply decide to file for divorce, such as after a heated dispute over the holidays, and expect the divorce to be finalized by the end of the year. According to the law, it takes at least 60 days to finalize a divorce from the date it started.

Much of this year-end tax rush affects couples who began divorcing months ago. In Michigan, Caplan said, most divorce cases are settled out of court, not brought to justice.

But even couples who are already stressed about an imminent divorce shouldn’t panic.

Divorce attorney Mary Anne Noonan, whose Royal Oak law firm is called FasTrackDivorce, said the arbitrators will make adjustments based on the new tax rules to reflect the changes when divorces are settled in 2019 and later.

It is possible that a monthly maintenance payment of $ 2,000 could be negotiated under the old 2019 rules and would be around $ 1,650 depending on the tax bracket. However, remember that the person who settles and receives maintenance in 2019 also does not have to report this money as income and pay taxes on it.

“It kind of comes out in the wash,” she said.

Even so, Noonan admitted that in some cases it now makes sense to also consider the new tax rules. She has a client whose husband plans to settle in December.

But the client is a preschool teacher who receives about $ 3,500 a month in maintenance, or $ 42,000 a year. The alimony would drive them into a much higher tax bracket in 2019 if it were taxable under the old rules, Noonan said.

“It is better for them to wait until January,” Noonan said.

Not every divorce includes alimony. State laws vary when it comes to spousal support.

For many people divorcing, alimony has been a useful tool in reaching an agreement and avoiding litigation, said David Stolz, a chartered accountant in Tacoma, Washington and a member of the American Institute of CPAs.

“That will change soon,” he said in a statement.

In the future, the alimony component of the equation will shift, and experts say that many women who receive alimony could be negatively affected.

“It will change the amount that is paid. It will be less,” Breitmeyer said.

If you no longer receive a tax break, your actual living expenses will increase after divorces settled in 2019.

As a result, some child support spouses might even have an incentive, if possible, to get a divorce in 2018. At least lawyers and others agree that this can be part of the negotiation.

Breitmeyer said it is important to know that couples cannot settle part of the divorce, like alimony, without solving other problems.

In general, alimony has often been part of divorces that include a long-term marriage of, say, more than 15 years and a marriage in which one spouse has a much higher income than the other, Breitmeyer said.

“It’s really about the income gap, the length of the marriage,” she said.

She added that all sorts of circumstances could come into play where alimony could come into play, such as a spouse in very poor health or someone unable to support themselves. Maintenance depends on the facts and circumstances surrounding the marriage.

The ability to get a tax break on living expenses has made the payout more palatable to some high-wage earners.

“It was a very nice little gap that was plugged,” said Breitmeyer.

Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow Susan on Twitter.

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