[REN #529] Alimony and Prenups Just Got More Costly

Picture of Mr and Mrs Sign for Real Estate News for Investors Podcast Episode #529

As taxpayers acquaint themselves with new tax rules, they are likely to find a few surprises. In addition to the new cap on SALT deductions, there are two other takeaways that could have an impact on real estate investors and anyone who’s married with a prenup.
 

Alimony Payment Deduction – Gone

Starting in 2019, alimony payments will no longer be deductible under new rules, and that could throw a monkey wrench into all the prenups that were based on payments that would be offset by tax deductions. According to Bloomberg, divorcees in the top bracket could pay “double in post-tax costs compared to what they had previously agreed to in their prenups.”

Attorney, Linda Ravdin, told Bloomberg, “We made a deal, and now Congress messed it up.” [1]

The situation puts many lawyers in an uncomfortable position. They may feel obligated to let their clients know about the new tax consideration, but are uncertain as to whether this would shake up a hornets nest among otherwise happily married couples. Some attorneys are avoiding a one-on-one delivery of the news, choosing to alert clients by emailing the information in a newsletter.

President Trump could be among those severely impacted by the deduction takeaway. He hasn’t disclosed the details of his prenuptial agreement with Melania, but he’s described the prenup as a “hard, painful, ugly tool” that has made his marriage stronger.

It’s apparently difficult to estimate the number of prenups that are out there, but a recent survey by the American Academy of Matrimonial Lawyers shows an increase in the number of millennials asking for prenups. 51% of the lawyers responding to the survey have noticed an increase among millennials, and 62% said they have seen more and more clients of all ages seeking prenups during the previous three years. The top three concerns that clients want covered in these marriage contracts are: protection of separate property, alimony payments, and division of property.

The AAML says the rise in prenups may be the result of millennials postponing marriage until they are more financially secure, and then doing something to protect what they’ve accomplished before they tie the knot. AAML president, Joslin Davis, said, “A prenuptial agreement often represents the most effective way to address these concerns and safeguard individual assets before exchanging vows.” But factored into the dollar signs of those agreements would be a tax deduction that offsets higher payment amounts. Many previously agreed arrangements are now, very likely, out of whack with any original intentions [2].

The deduction amounted to a dollar for dollar tax break for people in the top income-tax bracket. For spouses who agreed to pay their exes, let’s say, $10,000 a month, the lack of a deduction would effectively double that amount.

So why did lawmakers eliminate that tax break?

They apparently wanted to get rid of what they were calling a “divorce subsidy.” It won’t apply to divorces and separation agreements that are finalized before the end of this year, but starting next year, alimony payments won’t be deductible.

The new tax law also benefits the recipients. They previously owed income tax on the money they received but will now get that money tax free. And it’s that savings that will likely get renegotiated as smaller alimony payments in future prenup calculations. Attorneys say that recipients may get the short end of the stick, however, because they are usually in a lower tax bracket than the spouses who are paying them.

Whatever comes of this, divorce attorneys say, it will probably make the process more “acrimonious.” The deductibility of spousal support made the alimony pill much easier to swallow.
 

Investment Advice Deduction – Gone

Here’s another loss for real estate investors. You can no longer deduct your investment-advisory fees. They were previously deductible as “miscellaneous” expenses on Schedule A. But, starting this year, nada. This will hurt millions of investors, many of whom pay a fee based on a percentage of their assets.

The impact will depend on individual circumstances. Previously, those expenses plus various others had to exceed a filer’s income by 2% to be deductible. They were also disallowed if the taxpayer owed alternative minimum tax, so some high-income earners didn’t benefit from the write-off in the first place. But, as the Wall Street Journal reports, “many investors will feel the loss.”

The Journal offers some tips. Investors should know what they are paying for advice. That may sound like a no-brainer but a recent survey mentioned by the Wall Street Journal shows that 40% of investors don’t know what they are paying.

You can find that information in past 1099 tax forms for investment accounts that provide dollar amounts for capital gains and dividends. The IRS doesn’t require it, but advisory fees are often listed in this location. You may also find them in your statements.

Also, be aware of what you were previously allowed to deduct so you have a realistic comparison of your situation before and after the new tax changes. If you were not allowed to deduct this amount before, there’s not much to worry about now.

If you were allowed to deduct those fees before, then do some calculations to see how much you are losing. You may be able to renegotiate your fees.

The tax changes have been good to real estate investors for many other reasons. The loss of this deduction could just be a minor annoyance.

Links:

[1] Bloomberg Article

[2] AAML Prenup Survey

[3] Tips on Investment Advisory Fees: Wall Street Journal

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