Tax Cuts Might Impact Alimony
Tax deductions are on the chopping block in the House tax reform bill that passed November 16, 2017 which, in turn, would put more pressure on divorce negotiations across the country. The pending Senate version would leave things as they are.
If the House bill clause survives Senate revisions this week, anyone paying alimony for divorce decrees executed after December 31, 2017 would no longer be able to claim it as a tax deduction. Conversely, anyone receiving alimony after that date would no longer have to claim it as income and pay taxes on it. Those with decrees dated before December 31, 2017 would be unaffected.
Alimony is not as common as it once was, but according to a Reuters report quoting IRS statistics, some 12 million tax returns in 2015 listed alimony payments as a deduction. You can be sure that each and every one of those alimony agreements was painstakingly negotiated taking into account state and federal tax breaks. Even judges presiding over Equitable Distribution hearings routinely calculate tax deductions into their judgments.
So how would this change affect pending divorces? (Recall that alimony arrangements for decrees issued prior to Dec. 31, 2017 would still be able to take said deductions.)
Alimony is a monthly amount ordered by the court (or agreed to in a Marriage Settlement Contract) whereby the higher-earning spouse makes payments to the lower-earning spouse solely for his or her support. Negotiations for the duration and amount of Alimony are typically smoother when the payor calculates his or her tax deductions.
(Child support is calculated separately and in addition to Alimony using a different formula; it would be unaffected.)
For example: If one spouse is in the 50% tax bracket and pays $10,000 per month in alimony, the tax deduction under current law means the payor is saving $5,000 per month in taxes paid to Uncle Sam. Assuming the alimony recipient is in the 30-35% bracket, that means he or she is netting about $7,000 per month, after paying taxes on alimony as income. In other words, current tax law makes it more palatable for payors of alimony to meet their obligation, while giving lower-earning ex-spouses the ability to pay only at their lower tax rate.
The House proposal would do away with this incentive. The payor would have to pay full taxes on their income and then pay alimony, while the recipient gets the full dollar benefit of the payment without paying taxes. This would automatically encourage the recipient to press harder for full alimony and make the payor more reluctant.
Hopefully, this ill-considered tax change will disappear in the final tax bill put before the President, who has set a deadline of the end of the year to sign the bill into law. In the meantime, those who are very close to completing a divorce that includes alimony might do well to do what they can to obtain the decree prior to December 31, 2017.
– Elissa C. Goldberg, Esquire
Law Office of Elissa C. Goldberg
107 North Broad Street, Suite 211
Doylestown, PA 18901
Phone: 215-345-5259
Fax: 215-345-7458