A New York judge ordered Howard Gould to pay his ex-wife, Katherine Gould, $ 3,000 a month child support for the rest of her life. Mrs. Gould had argued that she shouldn’t pay income tax on alimony.
For the next 10 years, Ms. Gould fought her way to the US Supreme Court, which ruled that alimony is not taxable income. But that was in 1917.
Fast forward 100 years and the law is just the opposite. If the Goulds were still alive, Mr. Gould would receive a tax deduction for paying alimony today, and the payments received from Ms. Gould would be included in her taxable income.
If the Goulds were still alive, Mr. Gould would tell you that he has been since the Revenue Tax Act of 1942, in which Congress overrode Gould against Gould and allowed him to receive the alimony he paid to Mrs. Gould has to pull off, is excited.
She’d probably tell us 1942 wasn’t the best time. That’s because in 1942 Congress required people like Mrs. Gould, who received child support, to include those payments as part of their taxable income.
When the Revenue Tax Act of 1942 came into effect, it took a “woman who [was] Divorced or Legally Separated from Her Husband ”to allow payments received from her to be counted as taxable income, and her“ husband is allowed a deduction ”to pay alimony. For the most part, this law has hardly changed since 1942, but in favor of a gender-neutral language.
Proponents of the Trump tax plan are calling for the current law to be repealed in favor of an “exclusion / non-deduction” support system. At first glance, one might think that Trump’s intended abolition of alimony deductions is aimed at tax relief for the lower income spouses by excluding alimony payments from taxable income. Many argue that it has the opposite effect.
First, if you are already divorced or separated and are on maintenance, Trump’s tax plan does not apply to you. Only persons divorced or separated after 2017 and receiving maintenance can exclude the maintenance received from taxable income.
However, the tax plan allows individuals who change the terms of their separation agreement after 2017 to exclude the money from their taxable income.
However, most experienced family law attorneys believe that eliminating the tax deduction for high-income dependents would have unintended consequences for the low-income spouses who receive maintenance.
This is because the maintenance tax deduction creates a huge incentive for high-income spouses to provide higher maintenance payments than they would under Trump’s proposed law.
Trump’s tax plan also lacks awareness that higher income spouses who would lose the deduction are likely to move up to a higher tax bracket. This ultimately leads to a higher overall tax burden on the parties. Translation: The higher earner has less money to support.
This inequality in maintenance payments is not necessarily offset by simply marking it as excluded from the recipient’s taxable income. This usually results in the spouse being dependent on maintenance and ending up with less money.
This conclusion follows the position of the American Bar Association (ABA) Tax Section Task Force put together in the 1980s to investigate the Tax Reform Act of 1984, which proposed a conspicuously well-known waiver of exclusion / non-deduction.
In the early 1980s, the Senate Finance Committee campaigned for the alimony deduction, which was almost identical to Trump’s tax plan, to be lifted.
In 1984, the ABA Task Force argued that lifting the exclusion / non-withdrawal would harm not only wealthy individuals but also couples with less resources. Mainly because for less affluent couples, alimony payments come from future paychecks – not from transfers of income-generating assets that previously existed.
In fact, the language of Trump’s alimony tax plan is almost a literal replication of the previously failed 2014 tax reform bill that died shortly after it was introduced in Congress.
When the Joint Tax Committee provided its technical explanation of the 2014 Tax Reform Act, it stated its intention to follow the Gould v Gould Supreme Court ruling.
If Mrs. Gould were alive today, she would probably smile at it. But she’d be more disappointed to hear that Trump’s proposed abolition of the alimony allowance would not apply to people who divorced before 2018 – let alone 1907 (unless, of course, they change previous decrees sometime after the end of this year).
Donald TrumpDonald TrumpBiden names candidates for US ambassador to Germany Partisan prejudice in the constitution? Review the Dates The Ohio governor is sending nearly 200 National Guard members to the US-Mexico border MORE‘s tax plan, the Tax Cuts and Jobs Act, has just been approved by the House Ways and Means Committee. The Joint Committee on Taxation (JCT) estimates that removing child support deductions and including them in gross income would result in an estimated additional $ 100 million in Treasury Department revenue for fiscal 2018.
Proponents of Trump’s tax plan would argue that lifting the alimony deduction would lead to higher revenue for the Treasury Department. But that goal seems to thwart the intent of Trump’s tax plan to provide “tax breaks and simplifications for the American family” by focusing on empowering the middle class.
Edward Lyman is a California family law attorney with Walzer Melcher, LLP. Walzer Melcher has handled some of the largest divorce cases in California, representing actors, athletes, entrepreneurs, executives, and individuals.