You might remember that a year ago, on the Friday before Christmas (Christmas was on a Monday last year), President Trump signed a last-minute tax law--in fact, the most sweeping tax law in 30 years.
It contained many different tax cuts--largely permanent tax cuts for corporations, and temporary tax cuts for individuals that sunset in 2025. Because the whole thing was largely negotiated in secret, it also contained some surprises people didn't even notice at the time--including some hidden tax increases.
One of these individual tax increases goes into effect next month, and it has a big potential impact on anyone who gets divorced and has to pay alimony starting next year. Because unlike people who divorced earlier, they won't be able to deduct alimony from their income before they pay taxes.
That looming change has prompted "flood of last minute divorces," as one lawyer told me, with separated couples scrambling to ensure their paperwork is settled by December 31.
Why the change? We can't really know--but it's worth pointing out that its a big boon for the U.S. Treasury to take away this deduction. The IRS says that in 2010, nearly 600,000 taxpayers who claimed an alimony deduction--and the total amount added up to more than $10 billion.
Now, there is another side to this, although it doesn't come close to canceling out the elimination of the alimony deduction. Specifically, as people who pay alimony will now have to pay it with post-tax money, their divorced ex-spouses who receive alimony will receive it tax-free. (Previously they had to pay taxes on it.)
But this isn't a 1-for-1 trade. Not even close.
"While you might think that alimony recipients would want to delay until 2019," as a result, said Beth Logan, an enrolled agent with the IRS and author of Divorce and Taxes After Tax Reform, "this is generally not the case,"
The reason is that the deduction is almost certainly going to be worth more to the person paying alimony than the person receiving it. So, even people who expect to receive alimony have an incentive to push to finalize by December 31, assuming they have a good lawyer who can negotiate effectively. In short, there should be a bigger pool of money available--which would result in a larger net post-tax alimony payment.
Besides, as Russell D. Knight, a divorce lawyer in Chicago told me, soon-to-be ex-spouses who know they will wind up having to pay alimony "are making all sorts of quick concessions to get their divorces over quickly and avoid the tax liability. ... Trust me, everyone has researched it."
A bit of good news
We're talking about divorce here, so maybe "good news" is in the eye of the beholder.
But given that many people who plan to get divorced might only be learning about this looming deadline in the waning days of the year, there could be a small loophole in the deadline.
Specifically, it's that most lawyers I spoke with believe the crucial milestone isn't necessarily to have the divorce finalized in court by December 31. Instead, they conclude that simply making sure that a couple's alimony agreement is negotiated and signed by the end of the year should be enough.
Then, the couple can go to court in January (or any time in 2019, really), and finalize their divorce in front of a judge. Or even, possibly get into court during the week between Christmas and New Year's.
Honestly, it's the least productive week of the year anyway. And as Knight, the Chicago divorce lawyer told me, judges in his city "have declared themselves ready to divorce anyone, anytime to accommodate the flood of last minute divorces."
Maybe it's the same where you live. Talk to a lawyer--and if this article is relevant to you (meaning if you're in the middle of a divorce), here's to new beginnings, and best wishes for a better 2019.