New divorce tax rules could leave you with a big financial disadvantage

The War of the Roses could continue indefinitely.

And one key deadline could force couples to come to an agreement before the end of the year.

Dec. 31, 2018 is the date by which couples need to get the terms of their divorce settled before the tax rules on alimony change, a result of the Tax Cuts and Jobs Act that was passed last year.

Under current rules, alimony payments are tax-deductible for the payor and taxable income for the payee. Once the clock strikes 2019, however, those rules no longer apply.

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This change upends alimony procedures that have been in place for more than 70 years. And it is projected to raise $6.9 billion for the IRS in the next 10 years.

Divorce professionals are feeling the heat as couples scramble to get written agreements in under the wire.

“You’ve got to have a signed agreement before the end of the year if you want your permanent support to be tax-deductible and -includable,” said Peter M. Walzer, president of the American Academy of Matrimonial Lawyers.

Once the page of the calendar turns to 2019, it will be a new playing field for couples who are divorcing.

And financial professionals are already concerned that deals made under the new tax law will put the person who receives alimony at a disadvantage. That means women, who are already more financially vulnerable in a divorce, might have less money to work with post-split.

High stakes

Research has found that women generally fare worse financially after a divorce. Their income typically falls by more than a fifth, while men who have children often see their earnings rise by a third, according to research by professor Stephen Jenkins of the London School of Economics.

And the stakes for women may, in the end, be even higher with the changing alimony tax rules.

Financial advisor Stacy Francis, president and CEO of Francis Financial, said she has received many calls and emails from women celebrating the change. After all, if you’re receiving $3,000 a month in alimony and that’s no longer taxable, that could be a great thing.

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However, “even though that dollar amount you receive in alimony might not be taxable to you any longer, most likely the amount that’s going to be paid to you is a whole lot less,” Francis said. “There is going to be fewer dollars available for that alimony and also child support.”

While more women today are serving as household breadwinners, and possibly paying spousal support, alimony recipients are still mostly women. Data from the 2010 Census show that of about 400,000 alimony recipients, 3 percent were men.

Once the new tax rules take effect, “women are expected to suffer most,” Francis said.

Smaller payments

One divorce calculator shows that there could be less money to go around after the new tax rules go into effect — resulting in smaller alimony payments.

That is according to Analyze My Divorce Settlement, the latest tool from Boston University economics professor Laurence Kotlikoff’s company, Economic Security Planning.

“They do have to adjust the alimony amount in light of the change in the law,” Kotlikoff said. “It can be a dramatic adjustment.”

A hypothetical scenario run through the tool takes one couple who are both 50 and living in Colorado with no children. After splitting $1.5 million in savings and selling their house for $1 million, they both rent for $2,500 a month.

The goal of their divorce is to keep their living standard equal, according to Analyze My Divorce Settlement’s assumptions. So the husband making $500,000 will pay alimony payments to the wife, who makes $50,000 a year.

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