Hurry Up and Get Divorced?

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The New York Times recently had an article with the headline, “Hurry Up and Get a Divorce? For the Rich, There’s an Incentive,” indicating that the looming tax law change to maintenance would encourage people of means to finalize a divorce by the end of the year.

To recap: the tax law passed at the end of 2017 will remove the deductibility of maintenance for spouses paying maintenance for judgments entered beginning January 1, 2019. The tax consequence for wealthier individuals could be severe – a person paying $10,000 per month in maintenance would normally be able to deduct that amount from gross taxable income which, at the highest income tax rate of 39% would amount to a tax reduction of $46,800 a year – money that could be used for other purposes in an overall marital settlement. Now that money will be taxed, so instead of gaining family income of $46,800 per year the family is losing net income of $46,800 per year.

Another aspect of the tax law in play: mortgages are now capped in terms of deductibility at $750,000, and state and local taxes are capped at $10,000. This increases the tax burden on both spouses and further reduces net family income.

For wealthier couples who do want to take advantage before the law takes effect, they should work with their attorneys and financial advisors to examine creative ways to circumvent any of the negative consequences of the tax law changes – and figure out how to settle and get divorced by the end of the year. In Missouri, cases must be on file for 60 days before a judgment could follow, so filing quickly will also be an issue (in some states it may already be too late).

Money should not be the sole reason a couple should divorce, but for those couples who know their marriage is over, the financial costs of waiting too long could prove much higher than anticipated.

If you have questions about the new tax law and divorce, contact us – we can help.

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