New tax law prompting flood of accelerated divorces as Dec. 31 deadline looms

Local attorneys and judges are scrambling to finalize a flood of accelerated divorces prompted by new federal tax laws that eliminate the spousal support deduction starting Jan. 1.

Beating the Dec. 31 deadline will allow people expecting to pay spousal support to annually deduct the money from their taxable income, which can mean many thousands in tax savings for high earners.

Those who will receive spousal support also have an incentive, because judges are expected to start awarding smaller spousal support payments next year as the lost tax deduction shrinks what high earners can afford.

That mutual benefit prompted a rush of divorce filings before June 30, because a divorce can’t be finalized in California until at least six months after proceedings begin.

And now family law attorneys are scrambling to finalize those divorces by the end of the year, which is expected to prompt a flood of paperwork at local courthouses in November and December.

“Everybody anticipates that come December, the line for judgment day will be around the block because people want to get it done,” said Garrison “Bud” Klueck, a local family law attorney. “I imagine the courts will be devoting whole groups of court clerks to handle this.”

San Diego Superior Court officials say they expect an increase in divorce cases and have begun clearing a backlog of judgments so they will be ready.

“We will take actions needed to process judgments at the end of the year depending on the number coming in,” said court spokeswoman Karen Dalton. “We don’t have the funds to hire more clerks, so if we need resources, they will have to be shifted from other areas.”

Dalton, who listed paying overtime to some employees as another option, said officials plan to evaluate the situation thoroughly in October.

“We will adjust as necessary when we get a better feeling for the actual impacts,” she said.

Klueck said there was a sharp uptick in people filing for divorce during the first half of 2018, partly because attorneys began alerting clients to the impacts of the Republican tax reform bill shortly after it was approved last December.

To partly counteract large tax breaks for corporations and the wealthy, the bill eliminates many longstanding deductions including spousal support.

“In the past I would tell people it was a de facto way to have Uncle Sam and Uncle Jerry Brown subsidize them,” Klueck said. “Every dollar of alimony has only been 60 cents out of pocket, but unfortunately we can’t say that anymore.”

But the bill included a one-year window where people can “grandfather in” the eliminated deductions, which is crucial for spousal support because sometimes payments are required for as long as 15 or 20 years.

The surge would be even larger if more divorces included spousal support agreements, but only about 20 percent do.

Spousal support is relatively uncommon because many divorcing couples have young children, and judges calculate child support first. That often leaves little or no money left over for spousal support.

In addition, spousal support is only a significant factor in a divorce if one of the two spouses earns significantly more than the other.

Despite that, the Internal Revenue Service says about 600,000 taxpayers across the nation claim the spousal support deduction each year.

Eliminating the deduction, which has been in place in one form or another since 1954, is expected to have a wide range of impacts.

The most crucial is that judges are expected to start awarding smaller spousal support payments, primarily because the lost deduction will leave those paying spousal support with less income available to support their former spouse.

The prospect of smaller spousal support payments may also mean fewer divorces, with lower-earning spouses being more reluctant to end a marriage if their financial future is less secure.

Fran Setzer, another local family law attorney, said the prospect of smaller spousal support payments for divorces finalized in 2019 has served as an incentive for lower-earning spouses to help their mates accelerate the process this year.

One mitigating factor for them is that spousal support payments are taxed under the current law, but will not be taxed under the new law.

So they face a choice between a larger payment that will be taxed if they finalize the divorce in 2018, and a smaller payment that won’t be taxed if they finalize the divorce in 2019.

Setzer said the larger payment, despite it being taxed, is typically the best option. One reason is that the larger payment makes it easier to qualify for a car, a mortgage or to rent an apartment.

Another long-term impact of the spousal support deduction going away is likely to be more complicated divorces, particularly among wealthy and upper middle class couples.

Spouses can accept property in lieu of spousal support, or be granted a large share of their spouse’s retirement savings.

Setzer said the individual tax brackets of the two spouses can also create opportunities and potential complications.

In addition, the new law lowers taxes on small businesses and some high-earning professionals, potentially leaving more income eligible for spousal support.

“There’s an awful lot of other changes in the tax law that are going to affect us,” she said. “The spousal support one is the most obvious and probably the most glamorous, but there’s a tremendous amount of change we need to be aware of as family law attorneys.”

Setzer said all of the changes have forced family law attorneys to do more preparation and analysis.

“There is a general panic in the community because this is a very big change for us, and we’re also not entirely sure how this is going to filter down,” she said. “But we’re well prepared.”

There is also a caveat to the Dec. 31 deadline to finalize divorces. Through a process called bifurcation, a couple can agree on the spousal support portion of the settlement and get it approved by a judge even if other parts of the divorce remain unsettled.

“People can sever out a given issue, leaving other issues to be decided later,” Klueck said.

But there’s no away around the requirement that the divorce proceedings must have begun by June 30.

Setzer and Klueck said they’ve both had to break that bad news to many couples who have called since then trying to beat the Dec. 31 deadline.

“They are out of luck and they can’t get divorced this year, so they’ve lost out on the tax-deductibility,” Klueck said.

david.garrick@sduniontribune.com (619) 269-8906 Twitter:@UTDavidGarrick