New Tax Plan Creates Surprise Divorce Penalty

 

 

The Tax Cuts and Jobs Act (TCJA) presently under consideration in Congress, if approved in its current state, will mean as of January 1, 2018 that no alimony will be tax deductible for the payer, nor taxable as income to the recipient. This includes all alimony modifications made after January 1. All standing alimony orders will retain their current tax status.  I have referenced below news articles discussing this issue in further detail.

Apparently, nobody saw this one coming. The recently unveiled Republican tax plan would eliminate the current deduction for alimony, potentially changing the calculus of future divorce settlements.

Currently, ex-spouses who pay alimony or similar spousal maintenance agreements can deduct the expense from their federal income taxes and ex-spouses who receive the payments must claim it as taxable income.

Under the GOP tax plan, alimony would no longer be deductible by the payor and alimony income would be tax-free to the recipient. The proposed changes would affect written separation agreements and divorce decrees executed after December 31, 2017, but would not affect existing divorces.

DIFFICULT NEGOTIATIONS

As the person who pays the alimony is likely to be in a higher tax-bracket, the deductibility of payments to a former spouse makes paying alimony more palatable. Take away that deduction and future divorce negotiations could be very difficult, warned Malcom Taub, a high-profile divorce attorney with decades of experience.

For example, assume the ex-husband is a high earner with a combined federal and state tax rate of 50%. If the husband pays alimony of $10,000 per month, he gets a deduction that reduces his net after-tax cost to $5,000 per month, Mr. Taub explained.

Because of the tax break, many divorce attorneys suggest that some of the payments that would normally go to child support be shifted into the alimony category.

Now assume the wife is in the 30% bracket. When she receives $10,000 per month in alimony, her after-tax income is really $7,000. In effect, the wife is receiving an extra $2,000 per month above her ex-husband’s net expenses thanks to the government’s partnership in the transaction.

Under the GOP tax plan, if the high-earning ex-spouse pays $10,000 in alimony, the recipient would receive $10,000 tax free. But the only reason the first spouse would agree to pay $10,000 is that, after tax deductions, it would only cost him $5,000. Without the tax break, he would be reluctant to agree to pay $10,000 in the first place.

“If you eliminate the deduction, the payor will still want to pay the net number of $5,000, but the payee would only receive $5,000, not a net $7,000 as under current law,” Mr. Taub explained. “By eliminating the alimony deduction, you are going to be hurting the payee spouse.”

Source Investment News, Mary Beth Franklin, GOP tax plan creates surprise divorce penalty. Nov. 6, 2017.

http://www.investmentnews.com/article/20171106/FREE/171109959/gop-tax-plan-creates-surprise-divorce-penalty

 

 

The Tax Cuts and Jobs Act, unveiled on Thursday, includes a provision to kill the deduction that taxpayers get for making such payments to an ex-spouse. Although it’s just one of the many tax breaks eliminated under the legislation, experts say it will end up most hurting the person receiving the money.

“Alimony payers won’t be able to afford to give as much because they’ll have to give it to Uncle Sam instead,” said Nancy Hetrick, a certified divorce financial analyst and senior advisor at Better Money Decisions in Phoenix, Arizona. “There will be less money to go around to support the two households.”

If the deduction disappears, it would affect divorce agreements — where the amount and duration of alimony is codified — entered into after 2017. Child support, which is separate from alimony, already offers no deduction.

https://www.usatoday.com/story/money/taxes/2017/11/04/divorce-penalty-tax-reform-could-shrink-alimony-ex-spouses/831676001/

Source USA Today, Sarah O’Brien, Divorce Penalty? Tax reform could shrink alimony for ex-spouses. Nov. 4, 2017.

 

 

If the GOP tax bill passes as written, the change would affect divorces carried out after December 31. So it wouldn’t affect anyone already paying alimony.

Lawyers say it would have a big impact on how divorce proceedings play out. Avoiding taxes on alimony payments has made them easier to stomach for the divorcees paying them out.

Without the deduction, wealthier spouses may be less willing to agree to pay alimony in divorce settlements, said Malcolm Taub, who’s worked as a divorce attorney for nearly three decades.
Just how important are alimony negotiations in a divorce proceeding? Very, says Taub.

“A divorce lawyer has certain tools in their toolbox in order to settle a case and render a judgment,” he said. “One of the most significant tools in this toolbox is the tax deduction for spousal payments.”

The vast majority of divorce settlements include some sort of spousal payment provision, Taub said. And if couples are less likely to reach an agreement on alimony terms, divorce proceedings could become more gridlocked, time consuming and expensive.

Michael Beyda, a divorce attorney based in New York, agreed with Taub’s assessment.
“Spousal support is a very common aspect of any divorce negotiation,” Beyda said. “This will change the landscape.”

http://money.cnn.com/2017/11/02/pf/taxes/alimony-gop-tax-plan-deduction/index.html

Source CNN Money, Jackie Wattles, Alimony tax break killed in GOP tax plan. Nov. 3, 2017.

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