WASHINGTON — Some angry but bottom-line-driven couples are hoping to celebrate the New Year by making sure they finalize that divorce by Dec. 31.
The reason? Beginning in 2019, President Donald Trump's tax overhaul will eliminate one lucrative tax break relating to alimony.
For married couples who want to call it quits, the changes in the tax rules could make it more attractive for some to divorce in 2018, instead of dragging the process into 2019.
"As if there's not enough contention, now we have a time element," said Gil Charney, a director of the H&R Block Tax Institute.
Divorce attorneys say that they've been busy for the last few months of 2018, as couples take the new tax rules into account during mediation and divorce settlement conferences.
"I've been in mediation twice this week. I have two more next week," said Carol Breitmeyer, an attorney at Breitmeyer Cushman in Detroit, in mid-December.
Think of this as tax-conscious uncoupling — where a couple looks to separate with the least amount of tax damage possible.
About 27 percent of CPA financial planners said they have seen an increase in the number of clients seeking to finalize their divorce before 2019, with 6 percent citing a substantial increase, according to the American Institute of CPAs 2018 Personal Financial Planning Trends Survey.
The ex-spouse who pays alimony will no longer be able to deduct that expense unless the divorce settlement takes place before Dec. 31. It's a big deal if you're paying $30,000 a year or far more in spousal support and you're in a higher tax bracket.
Alimony was treated as a highly favorable, above-the-line tax deduction that reduced your taxable income even before your adjusted gross income was calculated. You can take above-the-line deductions, even if you don't itemize.
Some even called the tax break a "divorce subsidy" for those who pay alimony.
"The government decided to get out of the alimony business," Charney said.
What happens to alimony?
Beginning Jan. 1, those who divorce and pay alimony will no longer be able to take a federal income tax deduction for the alimony that they pay — ending a decades long practice, Charney said.
Some ex-spouses who pay alimony could be talking about paying thousands of dollars more in federal income taxes, if they drag out the divorce process into 2019.
Consider this simplified example: Assume the taxpayer earns $100,000 and pays $20,000 in alimony.
In this example, the ex-spouse paying alimony could end up handing over $4,472 more in federal taxes if the divorce isn't settled until 2019, Charney said. That's because the $20,000 paid in alimony would not longer be deductible and would be treated as taxable income.
To zero in on the impact of the alimony deduction, he said, the example assumed that the ex-spouse paying the alimony had no other income or deductions; and the spousal payments qualify as alimony, not child support, for federal tax purposes.
The tax rules regarding child support do not change. Child support payments are not tax deductible by the payer or included as taxable income by the parent receiving that support.
Who still gets a deduction?
An important point to know: The tax rules will not change for many people who already are paying or receiving alimony. Your alimony payments would continue to be deductible; and alimony received would continue to be reported as taxable income. (To claim an alimony deduction for a payment, the payer’s return must include the Social Security number of the ex-spouse receiving the payments.)
Lisa Featherngill, a member of the American Institute of CPAs, warned that divorced couples want to take extra care going forward with any modifications to existing agreements to make sure that any tax breaks remain in place, as well.
The huge change, though, directly impacts new divorces settled in 2019 and afterwards.
Featherngill, who is head of legacy and wealth planning at Abbot Downing in Winston-Salem, N.C., said she talked with her own brother-in-law to make sure that he settled his divorce by Dec. 31.
"We had this conversation at Thanksgiving," Featherngill said.
"Alimony is a painful thing and the only thing that makes it slightly less painful is that it's deductible," she said.
The new rules are part of the Tax Cuts and Jobs Act passed in December 2017. Some didn't understand the impact of the change; others just kept delaying.
If you can wait until the last minute to buy holiday gifts, you can find a million reasons to procrastinate on a divorce, too, even if a tax adviser suggests otherwise.
"As you would imagine, there is tension," Charney said. "It's dangerous for a tax professional to get in the middle of this."
What happens to those who receive alimony?
Nailing down a divorce by Dec. 31 means that the ex-spouse receiving alimony, who is often in a lower tax bracket, would still have to claim the money as taxable income.
Delay until January or later, though, and alimony received is no longer counted as taxable income.
As a result, a recipient of alimony payments could have an incentive to delay finalizing a divorce until 2019 so alimony would essentially be treated as tax-free to the person who is receiving it.
"It has become a big part of negotiations," said Matthew Caplan, partner at DAWN, Divorce Attorneys for Women in Bingham Farms.
"Obviously, there are two sides to the coin," Caplan said.
Caplan said he was going to court the week before Christmas solely because the spouse who faces paying alimony wants to accelerate the process for tax reasons.
But Caplan's client, who will be receiving alimony, doesn't want to rush, in part, because of the tax benefit of delaying until January. There are other reasons, he said, not to finalize that case now.
What to expect in the last-minute rush
In Michigan, it's impossible to simply decide to file for divorce, say after a heated argument around the holidays, and expect to complete a divorce by year end. In Michigan, by law, it takes a minimum of 60 days to finalize a divorce from the date it is started.
Much of this year-end tax rush involves couples who had started the divorce process months ago. In Michigan, Caplan said, most divorce cases settle outside of court and are not going to trial.
Yet couples who are already stressed out over a pending divorce shouldn't panic, either.
Divorce lawyer Mary Anne Noonan, whose Royal Oak firm is called FasTrackDivorce, said arbitrators will make adjustments, based on the new tax rules, to reflect the changes when divorces are settled in 2019 and later.
It's possible what could have been a $2,000 monthly alimony payment in December under the old rules might end being negotiated in 2019 to be around $1,650 or so, depending on the tax bracket. Remember, though, the person settling in 2019 and receiving the alimony would not have to report that money as income and pay taxes on it either.
"It's kind of coming out in the wash," she said.
Even so, Noonan acknowledged that there are some cases now where it makes sense to take the new tax rules into account, too. She has one client whose husband wants to settle in December.
But the client is a preschool teacher who would be receiving about $3,500 a month in alimony or $42,000 a year. The alimony, if taxable under the old rules, would push her into a much higher tax bracket in 2019, Noonan said.
"It's better for her to wait until January," Noonan said.
Not every divorce involves alimony. State laws vary regarding spousal support.
For many people going through a divorce, alimony has been a useful tool for reaching a settlement and avoiding a trial, said David Stolz, a certified public accountant in Tacoma, Washington, and a member of the American Institute of CPAs.
"Soon, that will change," he said in a statement.
Going forward, the alimony part of the equation is going to shift and, experts say, many women who receive alimony could be negatively impacted.
"It's going to change the amount that's paid. It's going to be less," Breitmeyer said.
After all, if you're no longer receiving a tax break, your actual cost of alimony goes up beginning with divorces that are settled in 2019 and beyond.
As a result, some spouses who receive alimony might even have an incentive to see a divorce finalized in 2018, if possible. At least, attorneys and others agree, that can be part of the negotiations.
It's important to realize, Breitmeyer said, that couples cannot settle one part of the divorce, such as alimony, without settling other issues.
In general, alimony frequently has been part of divorces that involve a long-term marriage, say more than 15 years, and a marriage where one spouse has a substantially higher income than the other, Breitmeyer said.
"It's really about disparity in income; the length of the marriage," she said.
But, she added, all sorts of circumstances can come into play where alimony might come into the picture, such as a spouse with very poor health or someone who is unable to support himself or herself. Alimony depends on the facts and circumstances surrounding the marriage.
The ability to receive a tax break relating to the cost of alimony has made the payout more palatable for some high-wage earners.
"It was a very nice little loophole that got plugged up," Breitmeyer said.
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