2018 is almost history. So is alimony deduction. The current administration’s efforts to reform the tax law has created a rush on divorce deals.
Federal alimony deduction comes to an end at midnight on December 31 and alimony will not be tax-deductible by the spouse making the payments.
Under present law, alimony can be deducted for the spouse paying alimony and the recipient no longer has to pay taxes on the amount.
“The pressure is huge,” said family lawyer, tk. “Once the tax deduction is gone, there will be less money for the family unit.”
State Guidelines
Feeding the rush to make a deal before New Year’s Eve is the lack of certainty in the wake of the tax law modification. New York state’s guidelines for alimony were enacted by the state Legislature in 2015.
Those laws were based on current tax laws with the higher-income spouse, usually the husband, having his payments tax deductible.
“The men are saying, ‘I’m not paying under the guidelines,’” said family lawyer tk “There is going to be chaos for the first months of 2019.”
The guidelines give some leeway for judges to consider a variety of factors when deciding how much the higher-paid spouse must pay.
Tax Accountants to Testify
An Office of Court Administration spokesman said there are no intentions to provide guidance on the upcoming tax issue to judges who decide divorce trials.
“As the judiciary, we follow the law,” the spokesman said.
That could mean more work for area accountatins. Most accountants are preparing to be called to testify in court cases.
The $100,000 Example
The federal tax laws surrounding alimony date to the early 1900s. The U.S. Supreme Court directed in 1917 alimony payments were not tax-free. That changed in the 1940s as IRS rules permitted spouses to deduct the payments.
The modification, sanctioned by Congressional Republicans, was necessary to stem the federal Treasury losses to $1.5 trillion over ten years. Removing the deduction will save $6.7 billion, a small sum compared to nearly $700 billion saved by the $10,000 cap on the deduction of state and local taxes.
The stakes are high. It’s not uncommon for high-end Lower Hudson Valley couples to hand over between $5,000 and $15,000 each month. A look at how the tax law treats an annual alimony payment of $100,000 is enlightening.
For example, the person paying the alimony earns $300,000 a year and hands over federal taxes of 35% on any earned income over $200,000. Under the present law, the taxpayer may deduct the $100,000 that is paid in alimony and the tax liability is cut by $35,000.
The spouse would now pay taxes on the $100,000, but at a lower rate. It’s a way the federal tax law has softened the economic blow that diverse delivers.
Advocates for women believe the loss of deductibility will complicate divorce settlements and will result with women receiving less than they are now as their spouses will have less to give.
“The incentives for the well-to-do spouse to be equitable have now been taken away,” says Robbie Schlaff, director of Westchester County’s Office for Women.
The Takeaway
Meanwhile, the whole issue is still being ‘studied.”
Assembly Judiciary Committee Chairman Jeff Dinowitz, D-Bronx, promised to learn more.
“I have not yet studied this specific issue, since this is the first time it came to my attention,” he said. “But I will certainly take a look at it.”
