Even if both parties agree to an adjustment in alimony, they’ll need to agree on exactly how much to cut the payers’ obligations. Divorcing couples could end up hiring rival accountants as expert witnesses to sway judges.
“No one knows the outcome of that kind of dispute,” Ravdin said. “When you go to court, it’s like rolling the dice.”
For those in the top income-tax bracket -- the likeliest to have a prenup -- being able to deduct the payout from taxable income had been a big saving because every dollar in alimony reduces the payer’s taxable income by the same amount. Top earners in high-tax areas like California and New York City can face marginal tax rates close to 50 percent. Without the deduction, a spouse who agreed to write a $10,000 check each month could be on the hook for what is effectively almost $20,000 in pre-tax income.
“Folks already don’t like paying alimony, so doubling the effective cost would be painful,” said Chris Chen, a financial planner who specializes in divorce-related matters at Insight Financial Strategists.
Alimony Recipients
Republican lawmakers said they eliminated the alimony deduction to end what they called a “divorce subsidy” under the old law. The change, which raises an estimated $6.9 billion over the next decade, doesn’t affect divorces and separation agreements finalized before the end of 2018. Starting next year, the newly divorced won’t be able to deduct alimony payments, but recipients will get the money tax-free (previously, the payments had to be reported as part of their taxable income).
Ultimately, the change could hurt alimony recipients. Payers could plead with judges to revise their obligations given the new law -- a valid legal argument given that many prenups specifically mention that the payments are intended be deductible. Those potentially reduced payments are likely to overpower the benefit recipients get from being able to receive the payments tax-free because they tend to be in lower tax brackets than the payers.
Divorce attorneys have already been warning that killing the alimony deduction could make splitting up more acrimonious.
Alimony deductibility “eases the pain of making the support payment,” Melcher said. “When that goes away, it makes it harder. There is less money to spread around.”
This article was provided by Bloomberg News.