40 THE QUEENS COURIER • QUEENS BUSINESS • SEPTEMBER 13, 2018 FOR BREAKING NEWS VISIT WWW.QNS.COM
Should You Get a Divorce Now or Later?
BY JOHN
SAVIGNANO, CPA
Lawyers and
accountants often
push their clients to
plan for unpleasant
events. Better to be
prepared now than
to pay the consequences
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Co-Author of the
best selling book
“Breaking the Tax Code”
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Salvatore P. Candela, EA, ATA, ABA
Enrolled Agent - Tax Advisor
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later. But
the Republican tax law that took effect in January
has added a new urgency for wealthy Americans
contemplating divorce.
Several key changes in the law may determine
whether it is better to complete or update a divorce
agreement by Dec. 31 or wait until the new year.
One of the biggest changes affects alimony,
which will not be a tax break for Americans whose
divorce agreements are completed or updated after
this year. The new tax law is also causing parting
spouses to look more closely at benefits for their
children and the values of privately owned businesses
and partnerships.
There is a lot of money at stake for wealthy couples.
Nearly 600,000 taxpayers claimed alimony
deductions totaling more than $10 billion for the
2010 tax year, according to the Internal Revenue
Service.
Here are four areas that couples considering a
divorce should examine before the end of the year:
Alimony
When it comes to alimony, the tax law is going
to turn the calendar back 77 years. That was when
the Revenue Act of 1942 first made alimony
deductible for the spouse paying it and taxable for
the spouse receiving it.
The deduction was granted to help couples make
the transition from being joint taxpayers to paying
separately.
But the arrangement has led in recent years to
underreporting alimony payments. The last estimate
from the I.R.S. showed that almost half of
recipients paid no tax on alimony or paid tax on an
amount that was less than what the former spouse
claimed as a deduction.
In other words, ex-spouses could be overstating
the alimony they paid to increase their deductions,
or ex-spouses receiving alimony could be understating
the amount. Or both.
The tax change could become problematic in
divorces settled after Dec. 31 because one spouse
will lose a tax benefit and the other will gain one.
Under the new system, the alimony payer will be
taxed on the full amount while the recipient will
pay no tax on it.
A simple solution for couples negotiating a
divorce, and expecting an alimony payment, is to
complete the agreement by the end of the year to
preserve the deduction. But this could be easier
said than done in an acrimonious divorce.
Business Valuation
But there are reasons to delay a parting of ways.
Other tax-driven divorce issues require a more
careful eye.
One is how private businesses should be valued.
This has always been an important component
of divorce settlements. But the new tax law
increases the cash flow of certain pass-through
entities — businesses where the taxes on the earnings
are paid by the owner, not the company — in
a way that raises their value.
Because of increased cash flow and reduced
taxes, my business could have gone from a value
of $6 million to $9 million. Whoever wants the
money will get more, and whoever has the money
will have more to give.
Figuring this out will require more valuation
experts, increasing the cost and time it might take
to get a divorce.
A business is almost always the most contested
asset in a divorce, with a lot of the numbers in a
settlement derived from its value.
One of those numbers is child support, which
was generally negotiated only once, with a provision
made for inflation-adjusted increases. This
raises the importance of getting the value right.
We might think that business might have a
higher valuation, but what does that mean? It
means wait and see. Any higher cash flow from
the change in the tax law this year will not be
known until the business owner files a tax return
next year.
The difference in valuation could be slight.
A $10 million business could be worth a couple
of hundred thousand dollars more under the
new law, which might not be worth holding up a
divorce settlement.
But not knowing that exact valuation throws
more uncertainty into the negotiations. So, for
couples going through a divorce now, and expecting
a big increase in the value of their business
next year, it might be better to postpone.
Prenuptial Agreements
For couples who drew up prenuptial agreements,
the outcome should they divorce is more
uncertain. It is common in prenuptial documents
for lawyers to insert language calculating alimony
payments based on years of marriage and a
clause saying alimony payments are deductible for
one spouse.
Jeffrey Cohen, a divorce lawyer at Cohen
Goldstein, said he was not sure whether these
clauses would hold up in 2019 and beyond.
“You have a written contract on the one hand, but
people say, ‘I wouldn’t rely on it,’” he said.
In the absence of guidance from the I.R.S. a document
providing for deductible alimony might not
be honored if alimony was no longer deductible. A
married couple might want to consider renegotiating
the agreement before the end of the year, even
if it might unsettle the marriage.
Other Assets
Child support has always been nondeductible
and remains so. But some practitioners are
reminding their clients to look closely at the tax
benefits of different assets.
For instance, couples should weigh receiving a
house versus a spouse’s retirement plan, said Jim
Mahaney, vice president of strategic initiatives at
Prudential. Traditionally, Mr. Mahaney said, the
spouse who has custody of the children wants
the house. But the new tax changes, particularly
in states where deductions for high state and
local taxes have been capped, may make the family
home less valuable in the long run than a retirement
account with a similar value.
Spouses who get the retirement account will not be
able to draw down on it until age 59½, but they will
have a more solid financial base in their later years.
And by opting for the retirement account over the
house, they can avoid paying those property taxes.
Examining how the wealthier spouse is going
to pay for a child’s education is also important.
Given the changes in the tax laws, 529 college savings
plans can now be used for private school.
They used to be limited to postsecondary and college
education.
This can help with school costs sooner, but it presents
several problems. One is whether enough money
will be left over to pay for college.
But Mr. Mahaney points to another: making sure
spouses don’t count the assets in a 529 plan toward
their contribution to school or college.
“The rules are the rules,” he said. But the new
tax law “adds a different level of complexity, and
the negotiation on the amounts is going to be so
challenging.”
John Savignano is a partner with Savignano
Accountants & Advisors located at 47-46 Vernon
Blvd., Second Floor, in Long Island City. If you have
any questions or require additional information,
please call John at 718-707-0955.
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