The new tax law is already leading to a myriad of positive economic consequences, from workers getting bonuses to Americans getting bigger paychecks. But one unexpected result of the tax overhaul could be a rise in the divorce rate.
While the U.S. tax code has generally contained what is known as a “marriage penalty” for years, there are some provisions in the new code that exacerbate the downsides of saying, “I do,” Jamie Hopkins, associate professor of taxation at The American College of Financial Services, told FOX Business. In fact, Hopkins said, recent changes “might create a lot of [divorce] filings this year.”
Typically in the U.S. tax system, two individuals with similar, higher incomes tying the knot are penalized because they are pushed into a higher income bracket, while exemptions or phase out ranges remain constant. This is known as the marriage penalty. Couples with disparate incomes, on the other hand, would generally be slightly better off, Hopkins noted.
Here’s what makes the new tax law a potential strain on the marriages of high-earning couples whose relationship may already be on the rocks.
The new tax bill altered many popular deductions, which, in some cases, will have a magnified impact on married couples filing jointly.
The controversial changes to state and local tax deductions, for example, will hit spouses harder, Hopkins said.
The Tax Cuts and Jobs Act imposed a $10,000 cap on state and local tax deductions, well below the average amounts claimed by individuals residing in states like New York, California and New Jersey. The average deduction claimed in California, for example, is $22,000, according to Kevin de Leon, a member of the California state senate.
Married couples will also be limited by the new $10,000 threshold, despite the combination of their assets, Hopkins noted.
Additionally, the tax overhaul also cut mortgage interest deductibility from $1 million to $750,000. Single filers and married couples are treated the same under that threshold as well.
Hopkins also noted the law’s extension of the Medicare surcharge tax and the phase-out of other tax credits, which increase tax liabilities for married couples.
Under previous law, the higher-earning spouse, could deduct alimony payments on his or her tax filings. The recipient included the payments as part of his or her taxable gross income.
However, for divorces finalized in 2019 and after, alimony payments will no longer be a deductible expense for the payer. This could serve to reduce the amount of money given to the payee, causing tax attorneys to have to divvy up an smaller pool of payment support.
“This could force a record number of filings this year,” Hopkins said. He did note, however, that historically people have not taken the tax penalty too heavily under consideration when weighing whether to say “I do.”
Nevertheless, starting next year individuals will likely want to renegotiate existing settlements based on the change in the laws.
“The next two years will be very good years for divorce attorneys,” Hopkins said.
While some couples may seek to finalize divorce agreements, or file for divorce, before year’s end, Hopkins said there could be another unusual effect resulting from the Tax Cuts and Jobs Act.
“We could actually see a rise in the number of ‘married, filing separately,’” he said. “That’s typically not a very highly utilized filing status. With a couple of these changes you could see that actually kick back in.”
According to The Wall Street Journal, the new 20% deduction for pass-through businesses could also benefit couples if they file using this status.
In 2015, only about 3 million out of 150 million Americans filed as married, but separate, The Journal reported.
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