by Dawn Budner
For couples considering divorce, Congress just made breaking up harder to do. The Tax Cuts and Jobs Act of 2017 (TCJA) removes a long-standing tax benefit for alimony payments. The change will not apply until January 1, 2019, but its potential impact is already creating controversy and concern.
The Alimony Deduction
For over 75 years, divorcing couples have had incentive to include alimony as part of their property settlement. Under current tax laws, alimony payments are deductible by the paying spouse and taxed as income to the receiving spouse. For couples with disparate income levels, this is a win/win.
Consider John and Mary, who divorce after 25 years of marriage. In the traditional model, John has been the wage-earning spouse, climbing the corporate ladder to achieve a significant income level. Meanwhile, Mary left the workforce 20 years ago to focus on raising children and managing the household. In this scenario, Mary may need additional education and/or training to become financially independent, and that is not likely to happen overnight. Alimony can provide a financial cushion during the transition. Apart from mere altruism, John may be motivated to pay alimony because (1) he can deduct alimony from his taxable income, and (2) while Mary must report the income, she is taxed at a lower rate than John. This “tax differential” means John and Mary collectively pay less tax on the same income. Score for John and Mary. But not for long.
Disappearing Divorce Subsidy
Critics have characterized the alimony deduction as a divorce subsidy, and even a penalty on marriage that undermines family values. With passage of the TCJA, the deduction will disappear for divorces finalized after December 31, 2018. TCJA proponents predict a resulting $8.3 billion in tax revenues over 10 years.
If Mama Ain’t Happy
But whose apron pockets will empty to fill the tax coffers? Recent census data reveals that 98 percent of alimony payments are made to former wives—only 2 percent to former husbands. In Texas, women already face a significant wage gap, earning only 79 cents for each dollar paid to men. For 150 years, Texas public policy prohibited court-ordered alimony. In 1995, facing widespread criticism as the only state lacking court-ordered alimony, Texas finally adopted “spousal maintenance” under limited circumstances. In general, maintenance is available only after a spouse proves she cannot earn sufficient income to pay for minimum reasonable needs (not current lifestyle), if the marriage has lasted at least 10 years. Maintenance must be awarded for the shortest reasonable period, with a maximum of five years for a 10+ year marriage, seven years for a 20-30 year marriage, and ten years for a 30+ year marriage. Finally, monthly maintenance is capped at the lower of (i) $5,000, or (ii) 20% of the husband’s average monthly gross income.
These provisions are out of step with the standard of living for many Texas families. As a result, divorcing couples often enter settlement agreements that include contractual alimony payments of greater value or longer duration than the court-ordered structure. Unfortunately, Congress just eliminated one of the strongest motivations for doing so.
Opponents criticize removal of the alimony deduction as “such [an] awful public policy that it is hard to believe that the people who proposed it understand the consequences of what they propose. For 75 years there has been a recognition that a divorced couple has financial burdens. The GOP is simply going to ignore those burdens.” See Stuart Levine, Tax Policy, Getting Into the Weeds on the Tax Bill, The Reality Based Community Blog (Nov. 4, 2017), www.samefacts.com/2017/11/tax-policy/getting-into-the-weeds-on-the-tax-bill/.
Divorce divides one household in two, doubling certain expenses and increasing others. Often, the result is financial stress during an already trying time, with a disproportionate impact on women. Recall our divorcing couple, John and Mary. John will exit the marriage with an earning capacity built over 25 years. In contrast, Mary will exit as a middle-aged woman who has been unemployed outside the home for more than two decades, lacking relevant job skills and experience. True, Mary shares the financial estate amassed during the marriage, but savings may be insufficient to cover Mary’s future living expenses. Nevertheless, Texas courts expect Mary to dust off her boots and get back in the saddle.
Poverty is Not a Family Value
Family dynamics have evolved over recent decades, with many fathers taking a more active role in child-rearing. Despite this progress, the “traditional” family structure is still prevalent, with many women leaving the workplace during what might otherwise be their most productive years.
The alimony deduction may not have appeared to foster family values, but its elimination certainly undercuts them. With 50 percent of marriages ending in divorce, a stable and constant parental presence at home may be a luxury few families can afford. Let this serve as a call to action for all Texas parents: protect your financial future with the same degree of vigilance you would bring to protect your child’s safety.
Dawn Ryan Budner is a partner at Calabrese Budner. She can be reached at email@example.com