Tax Overhaul Targets Alimony
Content of the Tax Cuts and Jobs Act (TCJA) was revealed last week and, as it now stands, alimony discussions will change dramatically. If approved in its current state, on this issue, going forward as of January 1, 2018, no alimony will be tax deductible for the payer, nor taxable to the recipient. This includes all alimony modifications made after January 1. All standing alimony orders will retain their current tax status for payer and recipient.
The TCJA is the most sweeping tax reform proposed in over thirty years and will impact a number of other areas that are relevant to divorce. I will be reporting on them after the changes are approved and finalized. In the meantime, however, the alimony issue is major and may impact how cases are handled and/or settled during the coming weeks. Every effort is being made to pass this legislation within the next thirty days. It remains to be seen how much it will be altered in the interim, but suffice it to say that we need to be paying attention.
Overall, this change is not, by definition, a “tax cut.” Quite the contrary. By continuing to tax the alimony payer at their higher rate, rather than transfer tax responsibility to the lower income ex-spouse, the parties’ joint pool of funds is drained of more, not fewer, dollars. Less is available for support purposes of one’s self, as well as a former spouse. Overall taxes on these dollars have effectively increased.
The change has been prompted by data which reveals that more than $10 billion was reported as alimony tax deductions in 2010, the last year for which data is available, but recipients reported $2.3 billion less as alimony income. Rather than reconcile the discrepancies and pursue any taxes due from the responsible party, the problem will prospectively be eliminated, requiring no additional effort on the part of tax collectors, and with a net increase in taxes levied.
Posted on 11/09/2017 9:13 AM by Rosemary Frank