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Changes to Tax Law Regarding Alimony and the Question of Whether and When to File for Divorce

When conducting a consultation (or what we refer to as a Case Evaluation Meeting), divorce lawyers walk a fine line on the question of whether a person should file for divorce.   Wise lawyers will make it clear that the personal choice to leave a marriage is better discussed with a therapist, pastor or close friend or family member.  From a personal standpoint, I often tell clients that this question is “above my pay grade.”  Quite frankly, the last person you want advising you on whether to end your marriage is the person who makes his or her living litigating divorces.  Instead, a more productive discussion is whether you should file if you are reasonably certain a divorce is happening, either because your wife has threatened to file or you otherwise see the writing on the wall.  In other words, timing is important.  We’ve written extensively on the importance substantively and procedurally of being the first to file. It is always better to be in control of the process. 

For those clients on the fence of whether to file even when a divorce isn’t imminent, a fair question to ask is, “do you see yourself married to this person six months or a year from now?”  If the answer is no, then the discussion of risks and rewards of filing now versus later needs to happen.  One way of looking at it is that now you have many known factors relevant to your divorce, such as that you are perhaps both healthy, employed, living together, etc.  And, significantly, we know what the law is right now.  Any of these things could change for the worse down the road if you delay in filing. While you’re on the fence, any assets and liabilities being accumulated or incurred will eventually be subject to division. In divorce lawyer speak we sometimes say, “there’s no cheaper time to divorce than now.”

This brings us to 2018 and changes to the tax code relevant to divorces.  As part of the Tax Cuts and Jobs Act, people paying alimony (which in Michigan is also referred to as spousal support) will no longer be able to deduct those amounts from their gross income.  Conversely, the recipient of alimony will no longer have to claim that support as taxable income.  The article, “Trump’s Tax Bill Will Make 2018 a Wild Year for Divorce,” by Ethan Wolf-Mann, Yahoo News, January 10, 2018, has an excellent discussion of what this change means to couples and how it may affect timing of divorces in the next year.  This is because this change won’t actually tax effect until after 2018, i.e. alimony paid pursuant to Judgments of Divorce entered this year will still be deductible as in the past.

Under the old Internal Revenue Code provision, the spouse with higher income could deduct alimony from their income at a higher tax rate than what the payee of support has to pay on that income.  Further, this deduction isn’t like an itemized deduction such as mortgage interest.  Instead, it is an “above the line” deduction which reduces the payer’s adjusted gross income by the amount of the alimony paid.  This was a tremendous tax advantage and often reduced the sting of having to continue to pay a former spouse.  In the example used in Mr. Wolff-Mann’s article, a higher income earning spouse would only pay 60 cents from his after tax income for every dollar paid in tax deductible alimony.  In the same example, the payee of support will only have to pay 15 cents income tax on that same dollar of alimony.  Under the new law, no one is getting a deduction; and no one is being taxed for support. 

In Michigan, there is no set formula for how much alimony will be paid.  Certain software programs make educated guesses on what should be paid, but ultimately alimony is an equitable award based upon numerous factors.  Judges will theoretically have to factor in that spousal support paid in divorces granted after this year will come out of the payer’s after-tax income and not be taxable to the payee.  This will dramatically impact how we negotiate and litigate this issue. For the higher-income earning spouse, our best guess is that it won’t be a positive development.

This brings us back to the issue of timing.  As it was, many couples accelerated negotiations and entered Judgments in 2017 when the effective date of loss of the alimony deduction was up in the air.  In fact, at least one family court judge in Metro Detroit wasn’t allowing parties to put deductibility language in alimony orders due to the uncertainty of the new tax code.  The one year delay in effectuating this change will cause an uptick in divorces being filed and closed out in 2018 for those families who would traditionally benefit from the old law. 

Good attorneys, good people, don’t wish divorce on anyone.  But if divorce is on the horizon and it is simply a matter of time before you’re facing it, now is the time to meet with someone and discuss timing.

 

About ADAM (American Divorce Association for Men)

The American Divorce Association for Men (ADAM) is a group of highly qualified attorneys who advocate for men’s rights in divorce, child custody and parenting time, paternity, support, property settlement, post judgment modifications, and other family law matters. Since 1988, ADAM has been aggressive, diligent, and uncompromising when representing their clients. A team of compassionate and skilled family law attorneys, ADAM is dedicated to being Michigan’s leading divorce attorneys for men

 

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