October 25, 2018

Frightening change in the Tax Code will haunt divorcing couples for years to come

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Pursuant to the Federal Tax Code changes, which went into effect earlier this year, the deductibility of alimony will be abolished in all divorces which are not concluded before January 1, 2019.  All divorces or decrees containing an alimony award prior to January 1, 2019 will retain the deductibility.  This change will cost individuals, who cannot conclude their divorce or obtain an alimony decree before the end of this year, tens of thousands, if not hundreds of thousands of dollars.  Currently, alimony is an "above the line deduction".  This means that for every dollar you pay in alimony, you are able to deduct a dollar of income.  For example, if you pay $10,000.00 a month in alimony, you get to deduct $10,000.00 of your income.  If you are in the 40 percent tax bracket, you would pay $4,000.00 from every $10,000.00 income that you earned.  Consequently, if you get to deduct $10,000.00 for your alimony payment, then you would be saving $4,000.00.

 

In the above example, the deductibility of alimony would only cost the paying spouse $6,000.00 to pay the receiving spouse $10,000.00 of alimony.  If someone is saving $4,000.00, then the loss of deductibility of that alimony payment would cost them $48,000.00 every year.  If you are paying alimony for 10 years, that means you would lose $280,000.00 worth of tax savings.  If you were only to pay alimony for 20 years, you would lose $960,000.00.  Consequently, this tax change is significant. 

 

The loss of alimony deductibility is compounded by the practical issue of the over burdened family law system. Unfortunately, the family law/divorce court dockets throughout Palm Beach County, Florida, and most of the country are heavily congested.  Consequently, people who are commencing a divorce case, will not be able to conclude their divorce cases before the end of the year to obtain a final judgment or decree concerning alimony.  Generally, contested divorces in Florida or elsewhere can take anywhere from eight months to twelve months or more from beginning to end.

 

            The common alternatives to a litigated divorce (private judges, mediation, or arbitration) are also over burdened and generally will take too long for the parties to conclude their divorce prior to January 1, 2019.  Consequently, individuals using these techniques, generally will not be able to obtain an alimony judgment before the end of the year. 

 

            One solution is collaborative divorce.  Collaborative divorce is a non-adversarial process which is more private, less expensive, and much faster than the traditional litigated divorce.  Parties have more control over their future, instead of surrendering the decisions for their future to a judge, who is a complete stranger to them, their children, and the circumstances of their marriage.  A judge is often times overworked, underpaid, and generally frustrated due to his or her extreme caseload.  The collaborative process is also beneficial because it is founded on "interest-based negotiations” instead of “position-based negotiation” that we find in the traditional mediation, arbitration, or litigating with private judges or in front of a family law judge.  The parties could either obtain a complete divorce (containing either an agreement of alimony or an alimony award) or enter into an alimony decree (a court judgment which deals only with the issue of alimony based on the parties’ agreement), before the end of the year by using a collaborative divorce process.

 

The impact of the change in alimony deductibility will be felt immediately after January 1, 2019.  Divorce attorneys are predicting that after January 1, 2019 it will become much more difficult to negotiate alimony settlements and more cases, including alimony as an issue, will go to trial.  The courts and family law judges are also predicted to become less generous in their alimony awards.  As a result, people will still be required to pay alimony.  However, without the ability to deduct their alimony payments, individuals will be less willing to pay the same amounts of alimony as previously.  With the increase of litigation, cost of divorces will increase with the result of individuals needing alimony will end up with less alimony.  Consequently, if anyone believes that they are in a situation where they may be paying or receiving alimony (for example if they are married 10 years or more and believe they are going to receive alimony), they should consult an experienced family law attorney immediately regarding what they should do in light of the loss of deductibility of alimony at the end of the year.

 

Florida Divorce, Board Certified Family and Marital Law Attorney, Alimony and Spousal Support

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