Child support payments are not deductible, but so-called unallocated support — payments that are meant to help a divorcing spouse and children at the same time — is deductible. That deductibility will also end for any new or modified divorce agreements, starting in 2019.
Divorce professionals are helping high-end clients devise complicated workarounds in the event they cannot complete their agreements before the deadline, including shifting the balance between cash and property changing hands in a settlement and funneling alimony payments through tax-exempt retirement accounts.
But mostly, they advise to finish negotiations before the end of the year.
“It is going to create a bit of a frenzy, especially at the end of the year, to get judgments through,” said David Magnuson, a financial planner in Burlingame, Calif., who earlier in his career worked as a divorce mediator.
It is too soon to tell in official statistics whether the deadline in the law is driving even a temporary increase in divorce rates. More educated, higher-earning Americans are less likely to divorce than their lower-earning, less-educated peers, research shows. Divorce rates have fallen in the United States, both since the 1980s and since the end of the Great Recession. Marriage advocates say the law might slightly reduce divorce rates in the long term, if it ends up hurting women, who are more likely to initiate proceedings.
“If the new tax regime is more likely to disadvantage them economically, that could put some damper, I would say a slight damper, on divorce over all,” said W. Bradford Wilcox, the director of the National Marriage Project at the University of Virginia.
Divorce professionals expect that in many cases, that will mean less money for the spouse receiving alimony — or, at the very least, a major source of contention in negotiations between parties.
“What we are telling clients is, the payer is going to have a lot of leverage to negotiate lower spousal support in 2019,” said Jeremy Runnels, a financial planner at West Coast Financial in Santa Barbara, Calif.