Taxing Travails in Splitsville
For couples thinking about divorce, Congress just made breaking up a little harder to do. The recent tax overhaul removes a long-standing tax benefit for alimony payments between former spouses. While the new rule is not effective until January 1, 2019, its potential impact is already creating controversy.
The Alimony Deduction
For more than 75 years, alimony payments have been deductible from the income of the paying spouse and taxable income to the receiving spouse. When divorcing couples earn disparate income levels, this wealth transfer is a win/win for both, and here’s why: Say Bob receives a salary that puts him in a higher tax bracket than his wife Sally. When they divorce, if Bob pays alimony to Sally, he can deduct the alimony payment from his income. While Sally must report the alimony as income, she pays taxes at a lower rate than Bob, making the alimony dollars more valuable to Sally than to Bob. This “tax differential” motivates Bob to provide alimony when he otherwise might not, because Bob and Sally will pay less tax on the same total income. Score for Bob and Sally, but not so much for Uncle Sam.
No More “Divorce Subsidy” After 2018
Indeed, the alimony deduction has been criticized as a “divorce subsidy,” or worse, a penalty for married couples, who cannot partake. On January 1, 2019, the alimony deduction will disappear. Legislators claim this change will bring an additional $8.3 billion in tax revenues over the next ten years. So, what’s the problem?
Opponents describe the new law 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.” Further, recent census data shows that 98% of alimony payments are made to former wives, with only 2% to husbands. Acknowledging this reality, some argue the new alimony rule is part of the “war against women,” eliminating one of the major bargaining tools available to the financially weaker spouse in most divorces.
Divorce as a Luxury
Divorce usually means that one household will split into two, thereby doubling some costs (such as housing) and increasing others, many less than obvious. When kids divide time between two homes, they may need school uniforms and/or sports gear at both locations, for example. In a divorce with two, relatively equal incomes, this increased financial burden makes a difficult situation even more stressful. But what about the couple with vastly different access to income/assets, where one spouse is virtually dependent on the other for financial support? This is where alimony comes in, at least until now.
Let’s go back to Bob and Sally. After 20 years of marriage, the kids are out of the house and the marriage is ending. And, while Bob supported the family by working up the corporate ladder, Sally hasn’t been employed outside the home in over 15 years. What options will Sally have now? In this scenario, alimony provides a financial bridge for Sally as she transitions toward a future that will require financial independence.
Sally represents many women who leave the workforce to raise children, only to find themselves financially dependent when the marriage ends. Presumably, in these marriages, the husband at least consents, if not fully supporting or even insisting on that outcome. Having one spouse at home to manage personal matters, not the least being child-rearing, relieves the employed spouse of those duties. But stay-at-home moms don’t usually take a salary or accrue retirement benefits. Nor do employers generally view room parent service as directly relevant job experience.
Mama Ain’t Happy
Texas women face a significant wage gap in the workforce: women earn $36,934 for every $46,791 paid to a man in a year-round, full-time position. Working Texas women are paid only 79 cents on the dollar compared to men, with an annual wage shortfall of $9,857.
Divorce has always been a daunting prospect for the financially dependent spouse, but “Texas is a standout in its stingy treatment of stay-at-home parents,” explains Dallas-based family lawyer Dawn Ryan Budner. Under Texas law, alimony (called “spousal maintenance”) is awarded only if the requesting spouse cannot earn sufficient income to meet her “minimum reasonable needs.” Even when this difficult burden of proof is established, monthly maintenance payments are capped at the lower of (i) $5,000 or (ii) 20% of the husband’s average monthly gross income. As Budner notes, “Texas couples can agree to additional alimony payments by contract, but Congress just eliminated the strongest motivation for doing so.”
Even today, it is vastly more likely that mom will stay home with the kids while dad goes to work to support the family. This dynamic raises its own set of issues, including whether dad has any real choice in missing milestones because of work responsibilities. But one thing is all too clear: women must pay as much attention to their own financial security as they historically have paid to the needs of their families. With elimination of the alimony deduction, the stay-at-home mom loses one of the best tools available to her in divorce negotiations.
With a mission to provide enlightened counsel and effective solutions that promote healing, growth and dignity, Calabrese Budner is the go-to family law firm for clients who demand better than the costly, impersonal, and often damaging courthouse experience.
Carla Calabrese was a founding member of the collaborative movement in Texas and is one of only five Dallas lawyers to earn the Master Credential in collaborative divorce. When litigation can’t be avoided, Dawn Budner brings knowledge and experience as a former litigation partner with an elite civil firm. In every case, the Calabrese Budner team applies the sophisticated tools that make collaborative divorce the better approach for families. Because compelling leadership means more than a loud voice.