Originally posted by Randy Kessler on LinkedIn: Abolish the alimony deduction, eh?
I was asked by the Daily Report, our area legal newspaper, to write my thoughts on this part of the newly proposed tax plan. Here is what I wrote:
If the new tax plan actually does that (eliminates the alimony deduction) as is proposed, what a whirlwind it will create. Let's start with the fact that it takes away one of the biggest incentives for the high-income spouse getting a divorce to help the no- or low-income spouse. Currently, the high-earning spouse can pay alimony and deduct the payments in their high tax bracket, while the recipient pays taxes on them in their low tax bracket. The family saves money, and the money moves from the wealthy to the less wealthy. This is generally a good thing.
According to media reports, the change will apply to contracts and orders concluded after 2017. However, anyone in the middle of negotiations should remain alert. This could be a real turning point.
When most high-income earners ask me about a settlement, they are rarely interested in paying alimony… until I explain that it is deductible. Their eyes light up. Suddenly the idea of ”I'm not going to pay her/him a single red cent in alimony” becomes the idea of ”Can we make the entire settlement alimony?” People start thinking creatively about how to resolve their case. And that's a good thing.
While the country saves a few dollars this way (not much, since taxes are already being paid on those amounts, but now they're being paid at a higher rate since the alimony payer is paying taxes on the money he/she earns and not deducting it and then paying the alimony with taxed dollars), the real losers are the dependent, non-wealthy spouses who could really use the support, since many alimony payers are now less willing to pay alimony if they lose the ability to deduct it. In fact, the people who need alimony may now need more government help if they no longer receive alimony. Wouldn't it be better if the alimony came from their former spouse? And since 50 percent of all marriages end in divorce, that could be a hell of a lot of people losing out on much-needed support. Let's not miss this unique incentive for the higher earners to help.
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