End of Alimony Tax Deduction Hastening Some Divorce Negotiations, Attorneys Say - NBC4 Washington
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End of Alimony Tax Deduction Hastening Some Divorce Negotiations, Attorneys Say

"We believe it's going to be much more difficult trying to get the dependent spouse the money they need to live on," said one family lawyer in Atlanta

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    What to Know

    • The elimination of the deduction is estimated to increase federal revenue by nearly $7 billion over a decade

    • How a divorce settlement plays out overall depends on many variables, but both sides saved money with the alimony deduction

    • IRS data shows nearly 600,000 people claimed the deduction on their 2015 tax returns, though only 414,420 people reported receiving it

    Divorce can be simple or it can be messy. For some, it's become a little more urgent.

    The $1.5-trillion tax overhaul includes the end of a 75-year-old deduction on alimony payments, to kick in at the close of this year. Recipients will also no longer have to claim such payments as income.

    The impact of the change depends entirely on how divorce settlements are structured and in what states couples live, but some matrimonial attorneys said things are already heating up among those who will pay alimony who are looking to manipulate settlements to adjust for the lost deduction.

    Others say panic hasn't set in just yet.

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    "It hasn't reached a fevered pitch, although it's certainly an enticement for the spouse who's going to pay alimony to reach a settlement by the end of the year," said Elizabeth Lindsey, a family lawyer in Atlanta. "We're all very interested to see how negotiations go because we believe it's going to be much more difficult trying to get the dependent spouse the money they need to live on."

    Such dependent spouses are usually women. As for how many are in the alimony equation each year, government statistics vary.

    According to Internal Revenue Service data, nearly 600,000 people claimed the deduction for alimony on their 2015 tax returns, the most recent year for which data is available. The same year, 414,420 people reported receiving alimony. Noncompliance is one factor in the discrepancy between those two camps, along with some alimony recipients falling below the threshold for reporting the extra income.

    The Joint Committee on Taxation, which advises Congress on tax matters, estimates elimination of the deduction will increase federal revenue by nearly $7 billion over a decade.

    The U.S. divorce rate peaked in the early 1980s and has been declining since. More than 827,000 couples around the country divorced in 2016, according to federal statistics.

    Proponents of the change called the alimony tax benefit a "subsidy" for divorcing couples, with some going so far as to believe that ending the deduction will discourage divorce overall.

    "Anybody who thinks that is absolutely out of their minds," said matrimonial attorney Joy Feinberg in Chicago. "I would say that the biggest hurt comes (for people who make) between about $60,000 and $500,000 in income for both. Stay-at-home moms and dads are really being hurt. There was just no reason to do this."

    Attorneys in states where guidelines for structuring settlements are in place are waiting for adjustments but said one thing is certain: Divorce and spousal support aren't going away. Peter Walzer, a divorce lawyer in Los Angeles, called spousal support a fundamental element of most divorces where there is a disparity of income.

    "This could make things worse because there will be less money to support a divided family," he said.

    Madeline Marzano-Lesnevich, president of the American Association of Matrimonial Lawyers, agreed the practical effect may be less money offered to a spouse who needs it the most.

    "They're feeling like, you know, you're going to definitely have less money because I'm definitely not going to offer as much because I don't get the tax break anymore. There's a power play here," she said.

    Susan Myres, a matrimonial attorney in Houston, said divorce lawyers handling high-income settlements "know what's going on and they are advising their clients and opposing counsel that time is of the essence if we're going to get this done."

    That, she said, "pressures the have-not spouse to negotiate when they may not be ready." She called the alimony changes "ill formed and ill executed." Myres called the current system "truly a transfer of income no different than if the payer had an employee that you owed severance for. Why is it OK for big businesses to do it but (in) the joint venture of a marriage you can't? That is just not logical."

    How a divorce settlement plays out overall depends on many variables. In terms of alimony, for example, high-earning Spouse A now pays and deducts $30,000 a year in alimony. Spouse A's income is federally taxed at 33 percent, so the deduction saves him $9,900.

    Lower-earning Spouse B owes taxes on the alimony at a 15-percent rate, paying $4,500 instead of the $9,900 that would be due at Spouse A's rate. The two have saved $5,400 between them, and Spouse A got a break that makes alimony payments more affordable to him or her.

    All of that will come to an end come Dec. 31. Unlike many other provisions in the Republican-led tax bill that expire at the end of 2025, the change on alimony is permanent. That irks some who work in the trenches of divorce.

    "For more than 70 years, alimony has been treated with sensitivity in the tax code," Glazer said. "That's no longer true."