Suddenly, the IRS will no longer have a seat at the table.
Griffin and Illana sat at the table, trying to avoid eye contact with each other. It had been three months since Griffin had moved out of the house and into an apartment close to his office, but their marriage had been breaking apart for years. This moment, sitting at the table, negotiating with a mediator who was being paid handsomely by the hour, was inevitable and expected. What Griffin and Illana didn’t expect was that there was a fourth, invisible party seated at the table: the Internal Revenue Service.
For the past 77 years, the IRS has been a partner in every divorce negotiation that involved alimony payments (also known as spousal support). That’s because the Revenue Act of 1942 set up a rule that divorcing couples have had to play by: The spouse who makes more money and has to pay alimony gets to claim the payments as a tax deduction. The spouse who receives the payments has to pay taxes on what they receive.
But come 2019, the new tax code is going to change all of that.
When a couple with children divorces, there is often a monthly child-support payment involved. The most common scenario is that the lower-earning spouse gets primary custody (the kids live with them) and the higher-earning spouse has to regularly contribute money that is specifically designated to support the kids. That money, known as child support, has been nontaxable. Nobody pays taxes on it, and nobody can claim it as a tax deduction. It’s like slipping your neighbor’s college-age kid $10 to mow your lawn. Nobody at the IRS needs to know.
“By creating a tax deduction for the higher-earning spouse, the IRS has been funding part of the divorce,” says Dean Hedeker, owner and principal of Hedeker Wealth Management. “Now it’s a direct negotiation between the two parties” (not counting the mediators, lawyers, marriage counselors, BFFs, mothers-in-law, your dog’s psychic, and everyone else who thinks they should have a say in your divorce).
What does this mean for Griffin and Illana? It means their already stressful, heartbreaking and traumatic breakup just became a bit more urgent. If they don’t get it finalized by Dec. 31, everything is going to change. And even the savviest of lawyers, accountants and financial advisers are bound to run into some confusion and chaos.
“There’s a lot of confusion!” says Hedeker. “We know what we’re going to get if we get it done by Dec. 31.” So everyone in the divorce world (is that a thing?) is hustling to get their papers filed before the ball drops in Times Square. Once that happens, everything will get more complicated.
The higher-earning spouse (in this case, it’s Illana … go girl) will want to pay less since they aren’t getting that deduction. The lower-earning spouse will want to receive more. Because … duh.
Making matters even more confusing? Agreements that are modified after Dec. 31 can be subject to the new rules if specific language is applied to the revised agreement. So even if Griffin and Illana hustle through all the paperwork, save their tears for their pillows and cram their negotiations into what’s left of 2018, either one of them could fight to update the terms of the divorce to reflect the new tax code later on. If either of them suddenly discovers a bag of diamonds that has been hidden under the mattress for a decade, renegotiating the terms of their divorce could potentially make those alimony payments nontaxable and nondeductible.
“Everyone’s talking about getting it done by end of year,” says Hedeker.
So it raises the question: Are we allowed to drink wine at the negotiating table?
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