AILSA CHANG, HOST:
Divorce lawyers and accountants have been advising many of their wealthier clients to hurry up and get divorced, like, now or at least before the end of the year because under the new tax law starting in 2019, a generous tax break for alimony payments will be gone.
With us now to explain how this is changing the game for wealthy couples contemplating divorce Is Jim Tankersley. He covers tax and economics for The New York Times. Thanks for being with us again, Jim.
JIM TANKERSLEY: My pleasure.
CHANG: So, OK, can you just first explain how this tax break for alimony works currently?
TANKERSLEY: So right now, if you get divorced – let’s say you’re a husband who is paying alimony to your ex-wife. You can deduct that, if you so agree with your spouse in the divorce settlement, from your taxes. But what’s going to happen is you won’t be able to anymore.
TANKERSLEY: Anything agreed upon before the end of this year if it’s not modified going forward…
TANKERSLEY: …Is grandfathered.
CHANG: So the couples that will be most impacted by this are those wealthiest ones in the top tax bracket.
TANKERSLEY: Absolutely because it means the most for them because they’re getting the biggest break from their taxes ’cause they pay the…
TANKERSLEY: …Highest marginal income tax rates.
CHANG: OK, so spouses who will be on the hook for alimony payments will be eager to get their divorce settlements finalized this year but also, I can imagine, spouses who will be receiving the alimony payments because I would think that my soon-to-be ex would have more of a reason to give me more alimony if he or she gets a bigger deduction out of it this year.
TANKERSLEY: Yes, but it affects different couples differently. For couples who make essentially the same amount of money, if they’re in the same tax bracket, this is just an accounting shift. The same total amount of money changes hands.
TANKERSLEY: But for couples who make different amounts of money and are in different tax brackets, what they basically got before was a subsidy from the government for their divorce…
CHANG: What do you mean?
TANKERSLEY: …Because the higher-earning spouse was able to pass on income that would have been taxed at a really high rate but then instead was getting taxed at a low rate.
CHANG: Got it.
TANKERSLEY: So that difference between the tax rates was just free money from the government. Now that goes away. So if you’re the husband, for example, who earned more and is paying that alimony to a wife, now you have to pay the taxes at the higher rate. That free money disappears, and so you are probably going to say to your ex-wife, sorry, there’s no more money; I’m not going to give you even more than I was originally thinking I was going to have to pay. And so you the ex-wife end up with less money overall. And in between, the government gets more money.
CHANG: And I can imagine most couples that have severely disparate incomes – it’s usually the woman who earns less. So this tax law change will probably have women bearing most of the cost.
TANKERSLEY: That’s what divorce lawyers and tax professionals and financial planners have been telling me – is that, yeah, it’s largely women who receive alimony. And particularly with wealthy couples, it’s largely women who leave the labor force to take care of kids or for whatever reason. And women earn less in the economy for the same work than men do. This is a potentially big loss for women…
TANKERSLEY: …Because they are the ones who are on the downside – had been the more beneficiaries of that government policy and now will be more hurt by the elimination of that policy.
CHANG: What was Congress’ rationale for getting rid of the alimony tax break?
TANKERSLEY: This is a way to raise revenue for the government. So by closing this loophole, they’re going to get more money in taxes, and therefore they help offset some of the enormous other costs of the rest of the tax bill.
CHANG: But, I mean, how much more money, how much more federal revenue are we talking about here?
TANKERSLEY: Well the Joint Committee on Taxation estimates about $7 billion over a decade.
CHANG: Seven billion dollars – wow, a lot of people get divorced.
TANKERSLEY: Right. A lot of people get divorced.
TANKERSLEY: And a lot of other people get divorced. And…
TANKERSLEY: Yeah, that’s real money. It’s also, again, a drop in the bucket of a $1.5 trillion tax cut.
CHANG: All right, that’s Jim Tankersley, tax and economics reporter at The New York Times. Thanks for talking to us.
TANKERSLEY: Thank you.