Getting a divorce? The new tax bill will complicate splitting up, especially for women.
- The new tax law makes alimony non-tax-deductible for the payer and non-taxable for the recipient, for divorces finalized after Dec. 31, 2018, thereby eliminating the existing tax incentive for bigger support payments.
- The existing deduction can save up to about 50 percent in taxes for top earners in high-tax states, such as New York and California.
- Women tend to be the recipients of alimony checks, and while having support not taxed might seem like a good idea, the overall reduction in the amount of alimony supplied due to higher taxation on payers will actually result in less monies paid.
If you are divorcing or recently divorced, taxes may be the last thing on your mind.
However, taxes can have a big impact on your wallet even more so now than any other time in your life. Starting in 2019, the new tax laws will be fully enacted and will eventually impact about half of the population — namely, couples who will be calling it quits.
The Tax Cuts and Jobs Act, signed into law December 2017, presents major changes that will significantly impact women and men going through divorce. This new tax law reverses the law introduced 77 years ago, which was created with the hope of freeing up more money for the divorcing couple and easing the transition from paying taxes jointly to separately.
Recently, Congress decided not to be so generous and is creating a difficult situation for divorcing couples who may be already financially strapped. This new legislation will raise an additional $6.9 billion over the next decade for the government — meaning less money for divorced individuals.
The major change in the bill is around who pays taxes on spousal support. Currently, the spouse paying alimony is the one allowed to take the deduction, while the one receiving payments is taxed according to their individual income bracket.
The new tax law makes alimony non-tax-deductible for the one paying, and the one receiving alimony will not pay tax on it. This new law will apply to divorces that are finalized after Dec. 31, 2018. Although people may file for divorce before the year is over, the divorce papers must be signed before 2019 to keep the tax break.
The tax deduction on alimony has often acted as an incentive, or “divorce subsidy,” allowing the higher-earning spouse to provide more dollars to their lower-income spouse in the form of alimony, because the payment would be tax-deductible to them. Due to the recipient paying tax at a lower rate than the payer, the recipient pays less taxes, resulting in more money for the family unit.
The deduction can save up to about 50 percent in taxes for top earners in high-tax states, such as California and New York. Therefore, for every $50,000 in alimony paid, it only costs $20,000 after-tax to the payer. The recipient, on the other hand, may only have to pay $10,000 in taxes on that $50,000. The net savings to the family is $40,000.
This “divorce subsidy” has also sometimes helped prevent the divorce from going to trial, especially when the divorce is extremely financially contentious. According to the American Academy of Matrimonial Lawyers, 95 percent of respondents expect that the new alimony rules will change how divorces are settled.
With more money going into federal coffers from the wallets of divorcing couples, a clear majority (64 percent) of matrimonial attorneys expect that the new tax code will make divorces more acrimonious. The law also may discourage many payers from agreeing to pay alimony, making a messier, complicated divorce more likely. Divorce lawyers also now fear the fallout could impact child support payments, which are often calculated in tandem with alimony settlements.
With both parties to the divorce fighting harder, the price tag for a split is expected to be much higher, as well. According to Nolo.com, couples who went to trial wound up spending an average of $19,600 in costs, including $15,800 for attorney’s fees. In contrast, costs plunged for those who were able to settle their cases spending $14,500, including $12,200 on lawyer’s fees. Even more overwhelming than the financial cost is the toll divorce takes on the family and children. More parent conflict brings an emotional cost on children that can be devastating. The longer a divorce is drawn out with lawyers and in courtrooms, the more emotionally taxing the divorce becomes for the children and the entire family.
Understandably, many couples may now try to speed up the process before the end of the year, rushing proceedings and possibly encouraging hasty decisions. Many divorce lawyers have said they haven’t been this busy in years. Couples are scrambling to sign papers before that ball drops in Times Square on New Year’s Eve, worried that their lives could be compromised. For these couples, fast-tracking their divorce to an agreement by the end of the year could save them a lot of money in the long run.
So is this new tax law particularly bad for women? Yes. Although the number of women paying alimony is increasing, women are still more likely to be the lower-earning spouse and receive alimony. It may seem that not paying taxes would be beneficial and sound like a good deal, but women should not fall prey to this rationale. With the elimination of the tax break, the pot of money will be significantly reduced and result in women — and unfortunately many children — receiving less support in the long run. The change is permanent and will likely result in less alimony being paid to the receiving spouse.
Women are already 80 percent more likely to be impoverished at age 65 than men. With retirement planning already a challenge for women — due to factors such as living longer, being out of the workforce longer and the gender pay gap — their financial future may be more at risk than their ex-spouses.
To help women bridge this gap, the previous tax bill allowed the non-working divorced spouse to make contributions to an individual retirement account or Roth IRA based on the alimony she was paying taxes on. Going forward, she may no longer be eligible to make these contributions to tax-advantaged retirement savings plans, putting her even further financially behind and further from affording a secure retirement.
So what should divorcing couples actually do?
The answer on how to approach the new tax laws is for men and women to educate themselves and create a support network of savvy professionals to help navigate these difficult financial decisions. By talking through the changes in the new tax law with a savvy financial professional, couples can better understand what the tax laws mean for their planned settlements and their family’s future. After meeting with such professionals, couples should have a clear understanding about the best timing of their divorce and if they should move forward to take advantage of the current divorce law before it’s too late.
CONNECT WITH US!
Let’s Keep In Touch
Enter your email to receive the latest stories from Grit and Soul.