New Tax Law May Lead to Surge in Divorces

Benjamin Franklin once quipped that nothing in this world is certain except for death and taxes. No one likes to talk about either, which is similar to divorce. It may not be as inevitable, but according to the U.S. Census Bureau nearly 50 percent of all marriages will end in divorce. In Aspen, the rate may be higher as it was recently named Colorado’s divorce capital. And the rate of divorce may see a bump in 2018 as a result of the recent tax bill passed by Congress.

How Are Things Different

For the last 75 years, the spouse paying alimony has been allowed to deduct payments from their taxable income. In Colorado, alimony is called “spousal maintenance.” For any divorce filed or concluded after December 31, 2018, the deduction will go away. As a result, divorce attorneys across the country are recommending people that are going to get a divorce do it sooner than later. Mary Vidas, a lawyer in Philadelphia and former chair of the American Bar Association’s section on family law was quoted as saying, “Now’s not the time to way. If you’re going to get a divorce, get it now.”

The repeal of the deduction for spousal maintenance is a big deal. We frequently use the deduction as a bargaining chip in negotiating a divorce settlement. It is one of the few “win-win” options in a Colorado divorce. The reason is based on tax arbitrage.

Show Me the Money: An Example

Assume that a husband in an Aspen divorce is a business executive and his income is federally taxed at 33%. His estranged wife is a homemaker who does not earn any income. The parties agree in 2018 that husband will pay the wife $30,000 per year in spousal maintenance. The husband will be able to deduct that amount, which results in savings of $9,900.

The wife will have to report the alimony as income, but she owes taxes at a much lower rate — 15% — than the husband. Her tax burden is $4,500 for the year. The parties save $5,400 between them. This means that the after-tax cost for the husband to pay maintenance is less than the benefit to the wife. The House Ways and Means Committee called this a “divorce subsidy.”

Why Does It Matter

The Census Bureau reports that 98% of recipients of alimony are women. The concern for many divorce lawyers is that women will receive less spousal support in the future under the new law. The National Organization for Women and American Academy of Matrimonial Lawyers opposed the tax change.

Some prenuptial and marital agreements have provisions for alimony that assume a tax deduction. Similarly, Colorado’s guideline formula under C.R.S. 14-10-114 was passed under the old regime where spousal maintenance was deductible. No one knows if Colorado will revise the guideline amount due to the change in tax consequences for alimony.

More Information

For more information on the change and potential surge in divorce filings in 2018, read Politico, USA Today, or ABA Journal.

Kalamaya | Goscha is an award-winning team of divorce lawyers in the Roaring Fork and Vail Valleys. We frequently work with CPAs, financial advisors and cutting-edge software to advise our clients on the complexities involved in divorce.