Originally published by Randy Kessler on LinkedIn: Eliminate the alimony deduction, huh?
The Daily Report, the legal newspaper of our time, asked me to write down my thoughts on this part of the newly proposed tax plan. This is what I wrote:
If the new tax plan actually does exactly that (eliminates the alimony deduction) as proposed, it will cause a whirlwind. Let's start with the fact that this removes one of the biggest incentives for the divorcing high-earning spouse to offer support to the non-earning or low-earning spouse. Currently, the high earner can pay alimony and deduct the payments at the level of their high tax bracket, while the recipient pays taxes on them at the level of their low tax bracket. The family saves money and the dollars shift from the wealthier to the less wealthy. This is generally a good thing.
News reports said the change would apply to agreements and orders entered into after 2017. But those in the middle of negotiations should raise their antennas. This could be a real game changer.
When most high earners ask me about severance pay, they are rarely interested in paying alimony…until I explain that it is deductible. Eyes light up. Suddenly the idea of “I won’t pay her/him a dime in alimony” turns into “Can we pay all of the alimony?” People start thinking creatively about how to resolve their case. And that's good.
Although the country can save a few dollars this way (not much, since taxes are already paid on these amounts), now they are paid at a higher rate since the payer pays taxes on the money he/she earns ( and not deducting it and then paying alimony with after-tax dollars), the real losers will be the dependent spouses with no money who could really use the support since many payers will now be less likely to accept alimony payments. when they lose the ability to pull the trigger. In fact, those who need support may now need more government help if they lose their support. Wouldn't we prefer if the support came from her former spouse? And with 50 percent of all marriages ending in divorce, that may mean many people are losing much-needed support. Let's not miss this unique incentive for higher earners to help.
Comments are closed.