By now, you probably heard about the change in alimony rules under the new tax law. If not, I’m here to help you through it. Here’s a sample of what other family law attorneys are saying:
[Previous rules] “made it much easier to do divorce negotiations,” said Madeline Marzano-Lesnevich, a New Jersey divorce attorney who is the president of the 1,650-member American Academy of Matrimonial Lawyers. She said she expects more resentment from alimony recipients…”
“It did make a very big economic difference,” divorce attorney Alyssa Rower, founding partner of the New York matrimonial firm Rower, said, referring to the alimony deduction. “It allowed people to pay more.”
“Starting in the latter half of the year, people are going to get pretty hysterical to get their divorces done,” Rower said
For divorces finalized in 2019 and beyond, the new law eliminates alimony as income for the receiver and as a deduction for the payer. So, which cases matter?
All your cases contemplating alimony. Federal and state income taxes will take a bigger bite and eliminate tax shifting. And since any settlement should be done net of taxes, there simply won’t be as much money available to distribute. To put this in perspective, I ran a few scenarios below. The results were too big to ignore.
In each scenario, Spouse 1 is the payer of alimony and is on the left side. Spouse 2 is the receiver of alimony and is on the right. Please don’t get too hung up in the details. The bottom line that concerns you are the “Old Rule Tax Savings” that have now disappeared. I calculated each of these for the year and for the month. See the bottom right of each scenario for the figures that matter to your cases—they’re highlighted in yellow.
Go straight to the video on this topic right here:
Get the worksheets below here.
$250 could cover a monthly car payment. $3,000 per year could cover ½ to 100% of a property tax bill.
What happens when we drop the income of Spouse 1 by ½? The money lost under the new law drops, but maybe not as much as you would think.
$2,000 a year or $167 a month evaporated under this scenario. Note that’s only a 33% drop ($83/month) when income dropped by ½ compared to the first scenario.
It gets more interesting as the income and tax rate differential increases and the alimony goes up. Here’s the last scenario:
$750/month could cover a house payment. $9,000 per year would cover over 80% of the room and board at the University of Illinois.
Note that in all three scenarios, Spouse 2’s taxes dropped but it wasn’t enough to offset Spouse 1’s tax increase. This money disappeared with a stroke of a pen December 2017. It’s not available to either spouse or their children anymore. It’s going to pay income taxes instead.
Get the worksheets above here.
What’s Important for Your Case?
- Higher tax rate differential between spouses = more money at stake.
- Higher alimony amount = more money at stake.
- There are only eight months left in 2018 so the clock is ticking.
- You need to run the numbers to determine the impact to your client, and I’m happy to help.
Do you need help with alimony?
Call me at 217-649-8794 or email me at [email protected] and I’d be happy to walk you through it. Let me know if you want to talk about alimony in your family law cases. The stakes are too high to make a mistake.
Josh Horn, CPA, CVA
Hi, I’m Josh Horn and I assist attorneys and judges with business valuation, damages, fraud, and taxes in their family law and litigation cases as a neutral, consultant, or expert witness. I don’t provide tax, financial statement, or bookkeeping services to clients. As a result, I have few conflicts of interest common to most CPAs. You get my dedication to helping you with business valuation and litigation as a specialist and not a “jack of all trades, master of none.” While business valuation can be complex, I balance thoroughness with practicality. I solve the problem you need solved in what could be the most important transaction or case in your life. You can work with me all year, not just after tax season and I’m available to testify. Ultimately, everything in a business comes down to value. Critical analysis and judgments can mean a hundred thousand or even a million-dollar impact on your client’s life and your case. Business valuation is what I
- Read about,
- Speak about,
- Receive most of my training about, and
- Spend most of my time doing.
“Your client’s future deserves better than today’s wild guess.” Josh Horn, CPA, Certified Valuation Analyst (CVA)
Tax Overhaul Seen Spurring More Hostile Divorce Negotiations, Investor’s Business Daily, February 28, 2018, https://bit.ly/2pBRQ3M
Tax Bill Drops a Bomb on Alimony Payments, ThinkAdvisor, December 20, 2017, https://bit.ly/2G8tCVF