The changes to the tax code will eliminate a break for those who pay alimony. The old system allowed those who paid alimony (also called spousal maintenance) to deduct that amount from their income taxes. The change goes into effect in 2019, but any agreement signed before the end of the year will be honored.
Rush to divorce
According to coverage in the New York Times, some financial planners and lawyers are advising high-income clients to take advantage of the tax break before it goes away. Typically, family law attorneys do not try to rush potential clients into getting divorced. However, closing this financial window has spurred a heightened sense urgency.
Why this tax break is useful
- Alimony payments go on for years — the loss of the tax break could mean 15 or 20 years, or more, of alimony payments.
- It’s the timing — these payments will likely stretch into the later years of a person’s working life.
- It’s something the rich often do – it’s estimated that 20 percent who claim the deduction are in the top 5 percent income earners.
- It enables them to pay more – Because the income going to alimony would otherwise go to taxes, those who pay often consider this money they won’t get anyway.
Potential impact of these changes
According to the IRS, 600,000 Americans currently claim deductions by paying alimony in 2018. Their agreements won’t change, but the new ones will. Different people have different theories of how this change will affect those who file for divorce. Some believe that the additional taxes for alimony may prevent couples from officially splitting up. Others fear that the income earner who pays alimony will pay the same amount, but the spouse receiving alimony will not pay income taxes on the payment.
These shifts in the law will likely cause more contentious exchanges as the terms of the divorce are determined. It’s advisable to speak with attorneys who work in divorce and high net worth divorce to determine the right approach for you in regards to alimony. Even straightforward divorces take time. With the looming tax deadline, it will be crucial to start the process as soon as possible if both parties wish to finalize their arrangement before the end of the year.