New Tax Law May Affect Gray Divorce
There has been a significant increase in the amount of gray divorces, or the divorce of couples after the age of 50, and a new tax law signed at the end of 2017 has the potential to affect them.
A little-noticed provision of the new law, the Tax Cuts and Jobs Act of 2017, eliminates the longstanding tax deduction for alimony payments. Since 1942, alimony payments have been deductible for those who pay them and have also been reportable as income for those who receive them. When the new provision kicks in on Jan. 1, 2019, alimony will no longer be deductible for the payer or reportable as income for the recipient.
Since the person paying alimony (more often than not, the husband) is usually in a higher tax bracket than the person receiving alimony (normally the wife), the result had been a tax break for the divorcing family as a whole. This is because the deduction was usually worth more in tax savings to the payer than the amount of taxes that had to be paid by the recipient of alimony. That will no longer be true under the new tax law. The U.S. Treasury will benefit, but only in the estimated amount of $700 million annually for the next 10 years, a pittance compared with the federal budget deficit.
What does this mean for people, like many of my clients, who are older with substantial assets and incomes? Alimony is actually not that common these days in the United States. The Census Bureau says that only 243,000 Americans received alimony in 2016 and that 98 percent of these were women. However, these “gray divorces” that I see in my practice are far more likely to be affected by the new tax provisions than divorces among younger people who haven’t built up much wealth.
Some experts say that the new tax regime will discourage divorce entirely.
Ken Neumann, director of the Center for Mediation and Training in New York City, was quoted in CNBC as saying that couples could reason: “We can't afford to get divorced without that tax benefit, so we're going to stay together, and I don't mean happily.”
Other experts say there could be a surge of divorces in 2018 as spouses try to claim the deduction before the 2019 effective date of the new tax law.
I doubt that we will see a rush to the divorce courts, and I also doubt that middle- or high-income people will stay together unhappily just to avoid the tax man. One thing is certain: Life will become more challenging for divorce lawyers who are trying to do the best for their clients. The old alimony calculations, which were based on the old tax treatment of alimony, will go out the window. People will continue to get divorced, and lawyers will continue to do their best to put their clients in the best possible financial positions.