Couples rush to divorce by year-end — to save on taxes

By Megan Cerullo

/ MoneyWatch

'Tis the season to get divorced. Attorneys are working overtime to help sparring spouses untie the knot before the new year, when the Tax Cuts and Jobs Act will change the way payments between ex-partners are taxed.

Divorce lawyers around the U.S. say they've seen up to four-fold increases in their workloads, while courts are also staying open longer to accommodate the flurry of couples scrambling to make their divorces official so they can benefit from allowances under previous tax rules.

In a memo obtained by CBS MoneyWatch, Florida Judge Tarlika Navarro recently cited the "changing tax laws" in saying she would make herself available for hearings over the Christmas holiday — that includes court extra sessions on Dec. 27 and Dec. 28, when the court is normally closed.

Lynne Strober, co-chair of the matrimonial and family law practice group at Mandelbaum Salsburg in Roseland, New Jersey, said she is working "crazy hours" to complete divorce settlements by year-end.

"Everyday I am working on getting a different case resolved," she told CBS MoneyWatch.

Why the rush to split?

Under current law, the person on the hook for alimony in a divorce — typically the higher-earning spouse — can deduct payments from their income, and it is the lower-earning ex who is taxed on that sum.

The Tax Cuts and Jobs Act, signed into law by President Trump in late 2017, shifts the tax burden from the alimony recipient to the person writing the check. That could mean more revenue for the federal government given that the payer is usually in a higher tax bracket.

In changing the tax law, the House Ways and Means Committee called the current treatment of alimony a "divorce subsidy," arguing that "a divorced couple can often achieve a better tax result for payments between them than a married couple can."

Keeping an eye on finances during a divorce

Dueling spouses have often separated and filed for divorces in January, after family holiday obligations are endured, but the looming tax deadline also gives couples incentive to finalize a split quickly. Steven J. Mandel, a family law attorney based in New York City, said he saw a big uptick in couples filing for divorce in June and July.

In most cases, he noted, his clients were already planning — or at least considering — a divorce. "I've never heard a couple say, 'Let's get divorced to save some money on our taxes,' " he said.

Divorcing couples hoping to beat the clock are now at the mercy of the court system — which has a backlog of cases waiting to be heard. "We have been calling up the clerk and court personnel to see if there is anyway we can get our clients' cases expedited," Mandel said.

Glenn A. Grant, acting administrative director of the New Jersey Courts, this month notified the state bar of the changes in the tax law related to alimony, urging attorneys to schedule uncontested hearings immediately.

"The Judiciary anticipates a higher than usual number of individuals seeking to obtain a final judgment of divorce prior to the end of the year," the notice read. "The Judiciary will endeavor to accommodate attorneys' requests to resolve these uncontested matters as expeditiously as possible," it continued.

Winners and losers in 2019 and beyond

Some professionals say that alimony recipients — who are overwhelmingly women — will benefit from the new law by avoiding taxes.

"One could argue that the new tax law, by getting rid of the deduction, hurts the higher-earning ex-spouse and it helps the lower-earning ex-spouse. That's what should be the answer, but in reality it's not nearly that clear," said Dan Caplinger an analyst with the financial website Motley Fool.

Start preparing your tax return now to maximize your return

Others say it is alimony recipients who will be worse off when the new law kicks in. That's because under existing law an attorney for the payee could argue that a former spouse should offer higher monthly payment given the accompanying tax deduction. But that legal rationale will disappear beginning in January.

"In some cases, that was a compelling argument, and advocates are concerned that by losing the deduction the lower-earning spouse loses leverage to negotiate payments," Caplinger said.

The tax deduction certainly makes paying alimony more palatable, according to Source Financial Advisors CEO Michelle Smith.

"It makes you think, 'OK, at least if I earn $2 million and lose $300,000 in alimony I get to deduct it, which brings my adjusted gross income to $1.7 million,' " she said, adding that "Male wage earners are definitely pressing for signing [their divorce settlement] by December 31."

Families penalized post-divorce

If the government's coffers could swell as a result of the tax law's new treatment of divorces, another party could suffer — families, as alimony payers are forced to cough up more in taxes.

"You are still a family after a divorce, and the family loses money that could be used if kids need something extra," she said. "It's a significant amount of money, and if a divorce is well along to settling anyway, it's a good idea to hurry up and get divorced now."

Peter M. Walzer, president of the American Academy of Matrimonial Lawyers, estimates a 20 percent increase in divorce filings this year compared to 2017. But the new law will likely have a negligible effect on divorce rates in the future.

"The research indicates that tax policy does influence decisions about getting married and staying married, but this influence is modest," said Brad Wilcox, director of the National Marriage Project and sociology professor at the University of Virginia.

"Changes in tax-related alimony deductions are not likely to have a huge impact on either the timing or likelihood of divorce for married couples in America."

First published on December 17, 2018

© 2018 CBS Interactive Inc.. All Rights Reserved.

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