Alimony Tax Deduction Repeal Delayed
As part of the U.S. Congress’ drive to reform the tax system, one issue that kept on arising was whether the alimony tax deduction would be repealed. The House of Representatives passed a version of the tax bill that included a repeal for divorces finalized after December 31, 2017, while the Senate version of the bill included no alimony tax deduction repeal.
In conference, both houses agreed on a final bill that includes the repeal. However, it will only take effect for divorces that occur after December 31, 2018.
Current Alimony Tax Deduction
Currently, a former spouse paying alimony gets a tax deduction, while the recipient pays taxes on the alimony as income. An article on Forbes.com explains why this is important:
[I]n most cases, after a divorce, the spouse paying the alimony is in a considerable higher tax bracket than spouse receiving the money. The difference between these tax brackets provides a benefit to the spouse paying the alimony and an even greater benefit to the one receiving it. Essentially, the spouse receiving alimony is getting considerably more in actual dollars than the spouse paying it.
Here’s an example: Say a spouse is required to pay $10,000 a month as alimony (or spousal maintenance) and is in the 50% tax bracket, including state and local taxes, and the spouse receiving the alimony is in the 30 to 35% tax bracket. A payment of $10,000 per month in alimony would result in a net payment of $5,000 a month for the spouse paying it. The spouse receiving the alimony might owe only $3,000 in tax on the money. Since the person getting the alimony would receive a net payment of $7,000 per month while the person providing it is paying only a net $5,000, the government is supporting the spouse receiving the alimony to the extent of $2,000 a month.
Joint Explanatory Statement of the Committee of Conference
The Conference Committee that approved the final bill included the following explanation of the alimony tax deduction change:
Repeal of deduction for alimony payments and corresponding inclusion in gross income
(sec. 1309 of the House bill and secs. 61, 71, and 215 of the Code)
Alimony and separate maintenance payments are deductible by the payor spouse and includible in income by the recipient spouse. Child support payments are not treated as alimony.
Under the House bill, alimony and separate maintenance payments are not deductible by the payor spouse. The House bill repeals the Code provisions that specify that alimony and separate maintenance payments are included in income. Thus, the intent of the provision is to follow the rule of the United States Supreme Court’s holding in Gould v. Gould, in which the Court held that such payments are not income to the recipient. Income used for alimony payments is taxed at the rates applicable to the payor spouse rather than the recipient spouse.
The treatment of child support is not changed.
Effective date.−The provision is effective for any divorce or separation instrument executed after December 31, 2017, or for any divorce or separation instrument executed on or before December 31, 2017, and modified after that date, if the modification expressly provides that the amendments made by this section apply to such modification.
The conference agreement generally follows the House bill. However, the conference agreement delays the effective date of the provision by one year. Thus, the conference agreement is effective for any divorce or separation instrument executed after December 31, 2018, or for any divorce or separation instrument executed on or before December 31, 2018, and modified after that date, if the modification expressly provides that the amendments made by this section apply to such modification.
The conference bill still needs to be passed by a majority of both houses of Congress and avoid veto by the President to become law.
If you need help reaching an agreement with your spouse regarding alimony or other family law issues, the attorneys of Family Diplomacy: A Collaborative Law Firm, are here to help.