Divorce penalty? Tax reform may scale back alimony for ex-spouses

Alimony payments required by divorce agreements could lose their tax advantages.

The Tax Cut and Jobs Act, unveiled on Thursday, includes a provision to remove the deduction taxpayers receive for such payments to an ex-spouse. While this is just one of the many tax breaks the legislation got rid of, experts say that in the end it will hurt the person receiving the money the most.

“Alimony payers won’t be able to afford to give that much because they’ll have to give it to Uncle Sam instead,” said Nancy Hetrick, a certified divorce finance analyst and senior advisor at Better Money Decisions in Phoenix, Arizona. “There will be less money to support the two households.”

If the deduction ceases, it would affect divorce settlements – which codify the amount and duration of maintenance – that were concluded after 2017. The child benefit, which is separated from maintenance, does not provide for any deduction.

Maintenance, also known as spousal maintenance, is often part of divorce agreements if there is a large difference in income between the two parties and the marriage has lasted more than a few years.

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In 2015, an estimated 598,888 taxpayers requested the alimony allowance on their Form 1040, totaling more than $ 12.3 billion, according to the Internal Revenue Service.

The withdrawal, however, was a hotspot for the IRS.

Under current law, the debtor deducts the amount and the recipient claims it as income and pays tax on it. A 2014 Treasury Department report found a large discrepancy in these amounts.

According to the report, more than half a million taxpayers claimed alimony deductions totaling more than $ 10 billion in 2010. On the flip side, the recipients’ reported maintenance income was $ 2.3 billion lower.

The new tax legislation would essentially shift much of the taxation from the recipient to the maintenance payer.

“Because of the different tax rates in these cases, it would have a negative impact on the payee. That is the bottom line,” said Malcolm Taub, co-chair of the Divorce & Family Law Group at Davidoff Hutcher & Citron in New York.

Since the former spouse who receives the maintenance is usually in a lower tax bracket, the amount of tax paid on the spousal maintenance by the recipients – the majority of whom are women – is lower. And courts, lawyers, and divorce planners take this into account when allocating assets.

To illustrate, suppose the ex-husband pays $ 3,000 a month child support and is taxed at 33%. In fact, at the time of taxation, the deduction reduces each of these payments to $ 2,000.

Let’s say on the receiving end that the ex-wife is in the 15 percent group. The $ 3,000 she receives is reduced by $ 450 to be used for taxes, leaving her with $ 2,550.

Under the proposed change, providing the same level of support to the ex-wife would cost the ex-husband $ 2,550 instead of $ 2,000.

“I don’t think courts could award the same amount as it wouldn’t be deductible,” said Taub. “There is only a limited amount of dollars in the pot.”

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