By Tom Metcalf and Christie Smythe (Bloomberg.com)
President Donald Trump knows first-hand that a divorce — or in his case, two — can be messy and expensive.
But if Republican lawmakers get their way, untying the knot could get even more costly for affluent Americans.
To help pay for sweeping tax cuts, the GOP’s “Tax Cuts and Jobs Act” includes a controversial provision that would scrap the break divorcees get for paying alimony. If section 1309 of the tax bill becomes law, financial planners and divorce lawyers say the result could hurt all but the uber-wealthy.
“I’m just praying this does not go through,” said Jacqueline Newman, a New York divorce attorney at Berkman, Bottger, Newman & Rodd LLP. “For many people in different income brackets, this is going to be horrible.”
Call it the divorce penalty.
Right now, every dollar in alimony reduces the payer’s taxable income by the same amount. Critics say getting rid of the deduction would not only increase the financial strain of supporting an ex, but could also lead to more legal disputes and deprive the less-well-off party of much-needed income. Historically, men have paid alimony to women.
And while the change is likely to affect a large swath of Americans, the extra revenue the government stands to gain — roughly $8 billion over a decade based on one estimate — amounts to little more than a rounding error versus $1.4 trillion of tax cuts House Republicans are proposing.
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Calling It Quits
“Taking that financial sweetener away makes it tougher for the payer to agree and honestly it just leads to higher lawyer bills to litigate the issue,” said Chris Chen, treasurer of the Association of Divorce Financial Planners. “It is going to make life miserable for hundreds of thousands of people.”
About 800,000 American couples called it quits in 2015, a rate of about a 100 divorces every hour, figures from the National Center for Health Statistics showed. While divorce rates have dropped among younger adults in the past quarter century, those among older married couples have risen, according to the Pew Research Center. For those over 50, divorce rates doubled.
“Reality is, it doesn’t necessarily dissuade anyone from getting a divorce but does mean both sides could be worse off,” said Justin Miller, national wealth strategist at BNY Mellon Wealth Management.
Tax breaks like the alimony and mortgage-interest deduction (which, by the way, is also being limited by the House bill) are critical to many divorced families trying to make ends meet, says Manhattan divorce lawyer Michael Stutman.
New York Couples
“Particularly in New York, you have a lot of couples who are barely keeping one house together with their income and now they’ve got to do two,” he said. “It is such a devastating economic event for most families.”
Eliminating tax benefits could “cost them another $4,000 or $5,000 a year,” Stutman said.
Of course, the bill only applies to couples who divorce after 2017 and alimony recipients would no longer need to report the benefit as taxable income.
Yet as with all tax bills, almost everything is up for negotiation. Kevin Brady, the chief House Republican tax writer, has already said more revisions may be coming. Republican Senator John Cornyn of Texas said the chamber’s tax-writing committee wouldn’t be using the House bill as a starting point.
“It’s a long, long road,” said BNY Mellon’s Miller. It’s “more likely a negotiating position. For now, we’re telling people not to panic.”
Still, any change could also have lasting consequences for child support, which is often calculated in tandem with alimony.
In some states, laws and guidelines for alimony are premised upon the fact that they’re tax deductible. States also vary widely in how they treat alimony. In Massachusetts, alimony can reach 30 to 35 percent of the gap in income between the spouses. In Indiana, spousal support is only granted when one party is disabled and can’t work.
“If you’re going to remove alimony as a pillar of spousal maintenance, you’re going to force all laws to change and it is going to be a complete mess,” Chen said. “Whoever is writing the bill can’t be making alimony payments.”
But like so many things associated with Republicans and taxes, there’s one group that could come out relatively unscathed: the richest of the rich.
For them, their investment income will likely dwarf any alimony deduction they might lose, according to Bernard Clair, a divorce lawyer who caters to wealthy and famous clients.
“I don’t think it really impacts that equation at all.”
— With assistance by Ben Steverman