The US Capitol appears in Washington, DC Photo by Joshua Roberts/Reuters
NEW YORK – Congress's sweeping tax overhaul will impact a range of deductions – even child support.
Republicans handed their sweeping plan to a jubilant President Donald Trump, who signed it into law on Friday. One provision eliminates the elimination of a 75-year-old alimony tax deduction. The new rules will not affect people who divorce or sign a separation agreement before 2019.
Many divorce experts fear the change will make negotiations more difficult and result in less spousal support because the money will go toward taxes instead. Congressional tax writers say it's only fair to married couples.
A look at the details:
WHAT CHANGES? How does it work now?
Currently, the spouse obligated to support can deduct it from their taxes and the spouse entitled to support must pay income tax on it.
In a divorce that began after December 31, 2018, the spouse liable for maintenance cannot deduct it and the spouse receiving the maintenance no longer has to pay taxes on it.
Divorce lawyers say the current arrangement tends to leave more money overall to divide between spouses, helping them afford to live separately.
“This has been very helpful in resolving divorce cases,” says Jef Henninger, a New Jersey matrimonial attorney.
SHOW ME THE MATH?
Imagine high-earning Spouse A now pays $30,000 a year in alimony and deducts it. Spouse A's income is subject to a 33 percent federal tax, so the deduction saves him $9,900.
Spouse B, who has a lower income, owes 15 percent taxes on the alimony and pays $4,500 instead of the $9,900 that would be due at Spouse A's tax rate. The two saved a combined $5,400, and Spouse A got a break that makes the payments more affordable.
Tom Leustek estimates that the deduction saves him about $5,000 a year—”not an insignificant amount to me,” says the New Jersey plant biology professor.
“The person who actually gets the money should be the one who pays taxes on it,” he says.
How many people actually receive maintenance?
Government statistics vary. According to the Census Bureau, 243,000 people received alimony last year, 98 percent of them women. According to the Internal Revenue Service, 361,000 taxpayers reported paying a total of $9.6 billion in alimony in 2015, although only 178,000 reported receiving spousal support. (The gap has vexed the government for years; the IRS announced in 2014 that it was improving its strategies for dealing with the discrepancies.)
Child support payments are separate and, according to census figures, over 4.3 million people received them last year. In some divorces, child support and alimony must be paid.
The divorce rate in the United States peaked in the early 1980s and has continued to decline since then. According to federal statistics, more than 813,000 couples divorced nationwide in 2014.
WHAT ARE THE ARGUMENTS FOR THE CHANGE?
The House Tax Committee refers to the alimony deduction as a “divorce allowance.”
“A divorced couple can often achieve a better tax result than a married couple when making payments to each other,” the committee found last month.
The panel also argued that alimony payments should be treated like child support, which is already not tax deductible for the payer and not taxable for the recipient.
Congress's bipartisan Joint Committee on Taxation estimates that eliminating the deduction will generate $6.9 billion in new tax revenue over 10 years. That represents less than half a percent of the $1.5 trillion tax cut plan.
WHAT ARE THE CONCERNS?
Critics fear that higher-earning spouses would not pay as much to their ex-partners without the deduction. New York matrimonial lawyer Malcolm S. Taub estimates that future alimony recipients will lose 10 to 15 percent of what they would receive under current law.
Lawmakers are “taking money from people who have gone through the trauma of divorce, and they are taking money from people at one of the worst times in their lives,” he says.
Some prenuptial agreements contain alimony provisions that provide for the tax deduction, said Scott Swier, a South Dakota attorney. Some states may need to change the alimony guidelines enshrined in their laws.
The National Organization for Women and the American Academy of Matrimonial Lawyers opposed the change. Boston-based family law attorney Regina Snow Mandl was so concerned that she sent an email alert to her clients. Massachusetts matrimonial lawyer Wendy Hickey says she's fielding calls from clients “in a panic because she wants to get everything done,” although pressure has eased since lawmakers pushed back the effective date to 2019.
Regarding the “divorce allowance” argument, Mandl counters: “I have never heard a couple say that they are getting divorced for tax reasons.”
Still, Association of Divorce Financial Planners President Cheryl Glazer notes that alimony is just one factor among many that will determine how a particular future divorce fares on the tax return.
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