Two months in, it appears that tax reform legislation giveth and the tax reform legislation taketh away – at least on the U.S. divorce front.
And it could lead to an avalanche of divorces among affluent Americans in 2018, and financial advisors better be ready for the rush for legal judgment.
The key issue is the elimination of the alimony tax deduction, and big bucks are at stake.
An overwhelming 95 percent of members “anticipate the new tax plan will change the ways in which divorces are settled and a clear majority of 64 percent believe that the cases will now become more acrimonious,” reports the American Academy of Matrimonial Lawyers (AAML).
Likewise, 62 percent of respondents feel that the changes in the tax plan “offers a greater benefit to the payee in terms of spousal support and 59 percent are finding that husbands are showing a greater sense of concern on the legislation’s repeal of the alimony deduction.”
That’s leading to a groundswell of concern among tax and divorce attorneys that the tax law could be both divisive and financially painful for divorcing Americans. For advisors with clients who are headed for splitsville, it also means more questions about the new tax law and their divorce situation – and a potential lack of encouraging answers.
“The new tax plan will most certainly alter the ways in which divorce cases are settled and couples need to be prepared for these changes,” said Madeline Marzano-Lesnevich, president of the AAML. “The elimination of the alimony tax deduction has removed a powerful negotiating tool and turned it into a difficult stumbling block for spouses trying to settle.”
Divorce specialists aren’t thrilled with the loss of the alimony deduction – and neither are their clients.
“With an already overburdened court system, the legislators should be seeking ways to make it easier for spouses to separate from one another and move on with their lives and be self-supporting,” said Lisa Zeiderman, a divorce attorney and founding partner at New York City-based Miller Zeiderman and Weiderkehr.
The tax bill released is a “serious setback” in time and money for divorcees, said Zeiderman.
“For decades, spousal support has been routinely tax deductible by the paying spouse and taxable as income to the payee spouse,” she noted. “The current tax rules allow for matrimonial attorneys to craft a settlement whereby it’s possible to make larger payments to the payee spouse at a lesser after-tax cost.”
This benefits everyone and more funds overall go to the family unit instead of to the government, Zeiderman said.
“The payer receives the benefit of a reduced tax obligation and the payee receives the benefit of more income than might otherwise be forthcoming,” she said. “Eliminating the tax deduction for the paying spouse in connection with alimony, also referred to as maintenance or spousal support, will only make it more difficult for litigants and attorneys to resolve the issue of spousal support.”
High Earners at Risk
The impact of tax reform on U.S. divorces is particularly onerous for high-income earners, other legal experts say.
“Divorces are often a drawn out, expensive and very difficult process, and the new tax law will make it even more onerous, especially for high-end earners,” said Jonathan Dana, managing partner at Feldesman Tucker Leifer Fidell in Washington, D.C.
Basically, if you have not reached a divorce settlement or received a court order awarding alimony on or before Dec. 31, 2018, alimony will no longer be tax deductible for the paying spouse, nor will be it taxable income to the payee.
“Individuals with a high net worth will face a heavier overall tax burden and there will be far less money in the pot to divide,” Dana said. “Consequently, it will be much more difficult for these cases to reach a settlement out of court and more individuals will face the burden of litigation.”
Remedies to the tax law/divorce problem are scant, but there is one sure way out.
“If a couple is in the process of divorcing and alimony is at issue, it’s essential that they work together to get to an agreement by the end of the year so that they can still jointly benefit from the tax deductibility,” Dana said.
Also, to better prepare and limit potential divorce battles in this new tax landscape, Marzano-Lesnevich encourages spouses to practice more financial transparency with one another.
“The monied spouse should seek a deeper understanding regarding the ways in which the support can help both the dependent spouse and the family moving forward,” she said.
“Additionally, the higher-income earner should stick to the numbers and offer more objective details about why a requested spousal support amount could be difficult to pay, rather than turning to acrimony or accusations.”
More Difficult to Settle
For financial advisors, the goal is to huddle with divorcing clients and crunch the numbers thoroughly.
“There is a real concern that divorces after 2018 will become more difficult to settle and more expensive,” said Bob Nemeth, a certified divorce financial analyst at Apple Growth Partners in Independence, Ohio.
The payer of spousal support is typically in a higher tax bracket than the recipient. It is assumed that spousal support payments will go down since the payer loses the tax deduction.
Thus, the payer’s actual cash flow available to pay support is decreased.
“The need for financial analysis to measure this impact on the spouses will be even more important in the future,” Nemeth said.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at firstname.lastname@example.org.
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