'Races to courthouse' expected before new alimony law takes effect

New federal law starting in 2019 reverses who pays taxes on alimony

By Nikki Kimbleton - The Morning Show anchor, Jodi Mohrmann - Managing Editor of special projects

JACKSONVILLE, Fla. - If you are considering a divorce, now may be the time to do something about it -- if alimony will play a role in your separation. A new federal tax law that takes effect next year might cause additional complications and anxiety for couples calling it quits.

The new federal alimony tax

The new Tax Cuts and Jobs Act reverses who pays taxes on alimony payments. For more than 70 years, the tax law allowed the higher-earning spouse to deduct the alimony they paid to their exes, while the "receiving" spouse was the one taxed at his or her income bracket. 

However, starting Jan. 1, 2019, that will reverse. The higher-income spouse will lose the alimony tax deduction -- meaning they will have to pay federal taxes on it. The "receiving" spouse will no longer have to claim that alimony payment as income -- meaning he or she will no longer have to pay the tax.

Who is effected by the new alimony tax law?

The new tax bill affects divorce agreements signed after Dec. 31, 2018, while divorces settled before that date will be grandfathered in under the old tax bill.

Michelle Barron, a certified financial planner who has a lot of clients that pay alimony, said this reversal isn't good for her clients or their alimony recipients.

UNCUT: Financial planner breaks down new alimony law implications 

"I am going to a quote from Ronald Reagan," Barron said. "He had once said that if you have a larger pie, you're going to get a larger slice. If you have a smaller pie, you're going to get a smaller slice. Once that deduction is gone, there's going to be less money to go around." 

For example, currently, a man who earns $500,000 a year and is in the top tax bracket is paying his wife $100,000 a year in alimony -- yet it only costs him roughly $50,000, after the tax break. The ex-wife receives the $100,000, but is left with $75,000 after taxes.

Starting in 2019, the ex-husband can argue that he can only afford $50,000, and the ex-wife would be left with $50,000 a year -- or $25,000 less. 

Once 2019 arrives, Barron said she will likely advise her clients who are just starting to pay alimony to pay less -- since they won't be able to write it off. She said there is really only one winner in this alimony tax reversal.

"We had the government who was trying to come up with ways to reduce taxes, and they have to come up with that money from somewhere, and they picked this group," Barron said. "The government wins. The government is always going to win."

Jacksonville divorce attorney Matt Hunt said he thinks there will be more divorces this year before the new law takes effect. 

"I anticipate there are going to be a lot of races to the courthouse," Hunt said. "There will be a lot of people that say, 'This doesn't make sense for either one of us. There's less money to go around for either one of us and more is going to the government, so let's negotiate a deal or get before the judge prior to January 2019.'"

UNCUT: Divorce attorney explains new alimony tax law

Tom Leustek, founder of advocacy group New Jersey Alimony Reform, said he was shocked by the change. Soon after the legislation passed, he wrote a report on its potential impact, and sent it to the office of New Jersey Gov. Phil Murphy.

Marriage & Divorce Rates

The most current numbers from the CDC give a snapshot of marriage and divorce in the United States.

 

"The two households created by a divorce simply cannot function as cheaply as the single household of an intact family," it reads. "The present tax structure that helps ameliorate those burdens has now been eliminated."

Barron said the process of separating is going to get even harder for those who don't finalize their divorces by Dec. 31, and then fall under the new tax law.

CDC: National marriage & divorce trends

"I think it's going to get even more difficult," Barron said. "Divorce is already ugly. I think it's going to be harder. When it comes to the division of assets, I think they have less negotiating room now. Before, you had a bargaining chip. This completely removes that bargaining chip." 

And take note: Even if you are already divorced and you already have an alimony agreement, if you renegotiate any terms after January 1, 2019, Hunt said you have to stipulate that you want the decree to remain under the old tax law.

“If your case was finalized prior to January of 2019, and now you are modifying it in 2019 or 2020, you have to specifically state in the agreement that the alimony that was modified still falls under the law of the time of the original alimony award," Hunt explained. "If you don't put that in there, it's going to fall under the new tax law."

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