Tax reform will have big impact on divorce
The new tax law passed by Congress late last year and signed into law by President Donald Trump does a lot of things. For example, if you’re fortunate enough to leave behind a huge estate, your heirs will now get the first $10 million tax free. In addition, the corporate tax rate on income for businesses has been cut dramatically.
Of course, Uncle Sam has to find a way to pay for these cuts. One of these ways will affect divorces dramatically: the elimination of the alimony deduction.
In a nutshell, before the new tax law, spouses paying alimony to an ex could deduct these payments from the amount of income they were taxed on. This would often be enough to move that spouse into a lower tax bracket, which would result in all of his or her taxable income getting taxed at a lower rate. The spouse receiving alimony, however, would pay income tax on those payments.
This is flipped under the new law. The paying spouse can no longer deduct alimony payments, while the recipient spouse gets his or her alimony tax free. This is a good deal for the government because the spouse paying alimony is generally in a much higher tax bracket than the spouse receiving it, meaning the government will make more money by increasing the paying spouse’s taxable income than it did from taxing the receiving spouse on the payments.
Now that alimony is not deductible, it may be harder for someone to make alimony payments while still paying as much in child support or school expenses. It could even make some couples feel they need to stay together when that’s not the best thing for either spouse or the children.
It will, however, have a massive effect on divorces. That’s because many states have “baked” the tax deduction into the formulas they use to calculate someone’s alimony payments. Judges also take tax deductibility into account when calculating alimony in order to bring about a quicker settlement. The loss of the deduction will no doubt make it harder for divorces to settle quickly.
Also, now that alimony is not deductible, it may be harder for someone to make alimony payments while still paying as much in child support or school expenses. It could even make some couples feel they need to stay together when that’s not the best thing for either spouse or the children.
This won’t apply retroactively. It applies to divorce and separation agreements signed on or after Jan. 1, 2019.
The alimony deduction is the provision most closely connected to the divorce process. But the new law includes some other controversial new revenue sources that could impact divorces too.
For example, if you’re paying state and local taxes, including property taxes, you can now deduct only the first $10,000 you pay each year, when you used to be able to deduct it all. This is bad news if you live in a city or state with high tax rates. If you have a home mortgage, you used to be able to deduct any interest you paid on that loan each year. Now you can deduct only the interest you pay on home loans of up to $750,000. Most of us don’t have mortgages that big, but if you live in an expensive part of the country, you could be hit hard.
These changes don’t directly relate to divorce, but they could impact the “gross income” that a court uses to calculate the level of support you have to pay, and they could also impact the real value of your home, which could complicate the divorce process further.
There’s a lot of other things in this complicated new law that could create traps we don’t even know about yet. To get a better handle on how the tax law could affect your divorce, consult with a family lawyer where you live.
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Father’s paternity undone after 16 years
Once a court rules that someone is a child’s father, it’s very rare for that order to be undone later on. In other words, once you’re deemed the dad, you remain the dad, with all the legal rights (like visitation) and responsibilities (like support) this may entail. But in rare cases, a court might actually undo or “vacate” such an order.
This happened recently in South Carolina.
Michael Ashburn was stationed at Parris Island around 2000-2001 while serving in the U.S. Marine Corps. While he was there, he had a relationship with a local woman, April Rogers, who became pregnant. The child was biracial. Rogers, who is black, told Ashburn he must be the father because he was the only white man she had ever been involved with.
Ashburn didn’t insist on DNA testing and instead agreed in a 2001 child support order that the girl was his daughter.
Over the next dozen years, Ashburn paid child support but had no relationship with the child. In fact, he only saw her twice — once when she was an infant and the Marines ordered him to do so, and once when she was 12, after Rogers demanded more child support. During that second visit, Ashburn took a DNA sample, tested it with a drugstore kit and learned that the girl was not, in fact, his child. A second test by the state department of social services confirmed this.
Rogers also apparently admitted at one point that she became intoxicated at a party around the time of the child’s conception and “something may have happened” with a different Caucasian male friend.
Ashburn went to court to have his paternity order vacated. A family court judge refused, finding no fraud on Rogers’s part.
But the South Carolina Court of Appeals reversed on the grounds that Ashburn and the child, now 16, had no emotional relationship, and their financial relationship wasn’t a strong enough reason to rule that it was in the child’s best interest for him to remain her legal father. Accordingly, the paternity order was vacated and Ashburn no longer has to pay support.
It’s important to note that this is the first time South Carolina has ever vacated a paternity order on appeal. It’s also important to note that the law may differ from state to state. In some states, it might be easier to get a paternity order vacated. In other states, it may be harder. Even more importantly, this court could have ruled differently if Ashburn and the girl had an actual emotional bond.
So, if somebody claims you’re the father of a child that you suspect may be someone else’s, it’s best to insist on DNA testing right away. Don’t depend on a court rescuing you from your obligations based on facts that come to light years later.
No maintenance for ‘self-sufficient’ ex-wife
When people get divorced and property is divided up, some of the assets may be the type that produces income (like investments or rental property, for example). In some cases, it’s possible that a spouse receiving income-producing property in a divorce may also be awarded maintenance payments from his or her ex.
If that happens, the paying spouse usually won’t later be able to point to “reasonably foreseeable” income from these assets to justify lowering his or her payment obligations. But a Missouri court decision shows there are always exceptions.
In that case, a couple divorced in 2004 and continued to share rental income from properties they owned. At the time of the divorce, the wife’s monthly income wasn’t enough to support her, so the husband was ordered to pay $700 a month in maintenance.
Eleven years later, the husband went back to divorce court seeking to be freed of this obligation, arguing that the rent they were receiving had increased a lot and now provided his ex-wife with enough income to meet her needs.
The wife argued that the “foreseeability rule,” which says that a foreseeable change in income from marital assets doesn’t justify lowering a support obligation, should apply here.
But the Missouri Court of Appeals disagreed. According to the court, the “foreseeability rule” didn’t outweigh the rule that spousal maintenance should only be paid until the other spouse is self-supporting.
The law may differ from state to state. Check with an attorney where you live.
Husband’s ‘egregious’ adultery nets wife bigger property split
While adultery can destroy a marriage, it typically doesn’t impact how property will be split during a divorce. In other words, a court usually isn’t going to give the betrayed spouse a bigger share of the marital property just to punish the cheater for his or her indiscretions.
But a recent case from Virginia shows that sometimes it will.
In that case, a couple who both came from modest backgrounds married in 1983 and built a successful poultry business. The wife also made some money on the side managing a high-school cafeteria, a job she planned to retire from soon.
At some point, the wife fell ill. Meanwhile, in 2015, the husband started having an affair, which he continued throughout his wife’s illness, refusing to break it off when his wife found out.
The husband also stopped actively operating the poultry business at a time when his wife was in no condition to run it herself. Still, when the couple got divorced, they had a house free of debt, a business that was free of debt and almost $500,000 in the bank.
Unable to agree on a property division, the couple proceeded to trial, where the husband assumed the judge would order the customary 50/50 split.
But the judge ordered a 60/40 split in favor of the wife instead.
According to the judge, the husband’s “egregious” adultery caused him to neglect the marriage, the home and especially the business. Reasoning that the husband abandoned the business as he was abandoning the marriage, the judge found that his adultery had a “direct adverse economic effect” on the poultry operation. This justified reducing his share of the marital estate.
This, of course, is just one case from Virginia. Results may vary from state to state and are also highly dependent on the facts of the individual case. So if you suspect that your own spouse’s infidelity may have impacted your family’s economic situation, talk to a family lawyer to find out what rights you might have in your state.
Wife is entitled to her ex-husband’s life insurance proceeds
If you’re planning on getting divorced, it’s a very good idea to change your life insurance beneficiary if you don’t want your soon-to-be-ex to still receive the benefits. It’s risky to assume your ex will automatically be disinherited upon divorce, as a recent ruling from South Carolina illustrates.
Married couple John McMeeking and Candace Murphy separated in 2010. At some point before their divorce became final, an order was issued resolving their marital debt as well as custody and support issues regarding their children. The divorce became final in March, 2014.
Shortly before that occurred, South Carolina’s legislature passed a state law disqualifying a former spouse from receiving his or her ex’s life insurance proceeds unless they specifically agreed otherwise.
John passed away in 2015. His life insurance policy still listed Candace, now his ex-wife, as a beneficiary, with his brother as an additional beneficiary. The insurer and John’s brother argued in court that the new law should apply because it was passed before the couple’s divorce became final. As a result, they argued, the brother should get the $100,000 (although the brother made it clear he planned to use the money for the benefit of the couple’s children).
Candace, however, argued that while the divorce was officially not final at the time, the order resolving their debt, custody and support issues — in other words, everything that needed to be decided in the divorce — counted as a “divorce” for purposes of the new law. Since that order was issued before the new law passed, she said, the new law shouldn’t apply and she should get the $100,000.
A federal judge agreed. So, if you don’t want to leave issues like this up to the whim of a judge and you plan on divorcing, talk to a family lawyer as soon as you can to identify all the “i’s” you have to dot and all the “t’s” you have to cross.