Alimony & Spousal Support

FAMILY LAW – HOW THE TAX OVERHAUL WOULD ALTER ALIMONY

Congress’ giant tax overhaul is poised to reach virtually every corner of American life – even Splitsville.

Republicans delivered their sweeping plan to an exultant President Donald Trump. One provision scraps a 75-year-old tax deduction for alimony payments. The new rules won’t affect anyone who divorces or signs a separation agreement before 2019.

Many divorce experts worry that the change will make negotiations tougher and lead to less spousal support as cash goes to taxes instead. Congressional tax writers say it’s only fair to married couples.

A look at the details:

What’s changing? How does it work now?

In any divorce commenced after Dec. 31, 2018, the spouse paying alimony can’t deduct it, and the spouse receiving the money no longer has to pay taxes on it. Now it’s the opposite.

Divorce lawyers say the current setup tends to preserve more money overall to allocate between spouses, helping them afford living separately.

“This is something that was very helpful in settling divorce cases,” says Jef Henninger, a New Jersey matrimonial lawyer.

Show me the math?

Imagine high-earning Spouse A now pays and deducts $30,000 a year in alimony. Spouse A’s income is federally taxed at 44%, so the deduction saves him $9,900.

Lower-earning Spouse B owes taxed on the alimony at a 15% rate, paying $4,500 instead of the $9,900 that would be due at Spouse A’s rate. The two have saved $5,400 between them, and Spouse A got a break that makes the payments more affordable.

Tom Leustek estimates the deduction saves him about $5,000 a year – “not a trivial amount to me,” the New Jersey biology professor says.

“The person actually getting the money should be the one who pays taxes on it,” he says.

What are the arguments for the change?

The tax-writing House Ways and Means Committee calls the alimony deduction a “divorce subsidy.”

“A divorced couple can often achieve a better tax result for payments between them and a married couple can,” the committee noted last month.

The panel also argued that alimony should be treated like child support, which already isn’t tax-deductible for the payer or taxable for the recipient.

Congress’ nonpartisan Joint Committee on Taxation estimates repealing the deduction will add $6.9 billion in new tax revenue over 10 years. That is less than half a percent of the $1.5 trillion tax cut plan.

 

Reference: The Associated Press, Jennifer Peltz

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