2018 was a momentous tax year for family lawyers. Congress changed all the rules and the ones abandoning the tax exemption for alimony came as a special surprise. All of us know the Tax Code was changed in other aspects with a lot of tax exemptions sunsetted; at least for now.
Not much was discussed about the tax rates. We know they went down. But for those of us who practiced long before the Tax Cuts & Jobs Act of 2017 November was the time of year when clients would bang on our doors with this inquiry: “This is gonna get done before 12/31, right? I don’t want to file jointly and I sure don’t want to pay married separate rates.”
The Married/Separate portion of the tax tables used to have a dark cloud over it. A taxpayer’s status is determined based on their marital status on the last day of the tax year. If you are divorced on or before 12/31 of a tax year, you could file as single for the entire year and use those rates. Those rates used to be significantly lower than the other table called “Married/Separate.” Yes, you could always file jointly but a joint filing meant joint and several liability; a status to be avoided especially if one of the taxpayers is self employed or inclined to game his or her income or deductions. (Note; we are not discussing head of household status which is a whole different matter).
This year as November 1 rolled around I received notice from my local family court administrator that divorces not processed by November 29 might not be concluded (i.e., issuance of a decree) before the magic date of 12/31/21. So, in a couple of them I wanted to give my opponents a “giddy up” by noting the looming divorce/tax deadline. In one instance where the taxable income was going to come in at roughly $500,000 I thought it provident to run the numbers and show the difference. It shocked me. Married separate $153,500 in federal tax. Push the decree over the finish line on or before 12/31 and the taxpayer is at $149,800. Of course the client/taxpayer would say $3,700 is not a matter to mock but how many times have lawyers spent hours and hours of billable time trying to “git her done” only to see the decree not finished before the ball drops on the New Year. Even if we look at income of $1,000,000 the difference is roughly $4,000. If the income is less that $300,000 the rates are the same whether single or married separate. After $307,000 the married separate person starts to pay 37% on each marginal dollar of income. The single person doesn’t reach that plateau until $518,000 of taxable income.
So, those of us who are old dogs need to adjust to new tricks and for better or worse, in most instances, the rush to have a signed divorce decree before years’ end is no longer the bone it used to be.