Under the current federal tax scheme, a divorced spouse who pays alimony may deduct those payments from his or her federal taxable income; by contrast, a divorced spouse who receives alimony must pay federal taxes on the alimony. The alimony-payment deduction incentivizes high-earning spouses to pay larger alimony amounts to low-earning spouses, thereby benefiting both spouses and facilitating divorce settlement.
As most of you know, the GOP is pushing hard to cut taxes. However, in order to pay for tax cuts, they are looking to eliminate many deductions that individuals rely upon in tax planning. Currently, the alimony-payment deduction is on the chopping block. Section 1309 of the GOP tax plan, the “Tax Cuts and Jobs Act,” provides that “alimony payment [will] not be deductible by the payor or includible in the income of the payee.”
The influential American Academy of Matrimonial Lawyers recently came out against the proposed plan, and with good reason. Eliminating incentives for high-earning spouses to agree to larger alimony payments is bad news for both high-earning and low-earning spouses. Under the proposed plan, the paying spouse will be incentivized to keep alimony payments to a minimum, and, while the receiving spouse will get alimony payments tax-free, those payments will likely be much smaller than they might otherwise have been. For both paying and receiving spouses, Section 1309 eliminates many of the strategies employed to maximize after-tax available income. If implemented, it will negatively affect divorcing spouses’ ability to utilize the tax deductibility of alimony in reaching settlement.
The good news is that Section 1309 applies only to individuals divorced or separated after 2017. Additionally, if the past is any indication, significant obstacles stand in the way of this proposal passing, and, even if it ultimately passes, there’s no telling whether Section 1309 will survive the legislative gauntlet. Practitioners and those contemplating or undergoing divorce need to be aware of – and closely monitor – this potential change. If you’re in divorce negotiations right now, and alimony is a critical issue, it behooves you to complete negotiations and reach agreement before year’s end.
UPDATE: Read Jonathon Dana’s letter to U.S. Senators opposing changes to the Alimony Tax Deduction.
Also read Jonathon Dana’s The Hill Letter To The Editor: Congressional tax bill negotiators: Don’t make divorce more taxing