Tax Reform Bill Would End Spousal Support Deduction

 Posted on November 15, 2017 in Alimony / Maintenance

The proposed tax reform bill in the U.S. House of Representatives has caught the attention of divorce attorneys. The bill would eliminate the federal tax deduction for spousal maintenance as part of an effort to offset massive tax cuts. Recipient spouses would also no longer pay taxes on their maintenance payments. The changes would shift the tax burden from the recipient spouse to the paying spouse. However, the recipient spouse may find it more difficult to obtain spousal maintenance during a divorce.

Tax Deductions

Under the current federal tax law, people may deduct the entirety of spousal maintenance payments they make, as long as:

• The payments are not related to child support or property division from the divorce;
• The former spouses are not filing a joint tax return;
• The former spouses do not live in the same household; and
• The payor can provide proof of the payments.

Recipients must include the maintenance payments as part of their taxable incomes. Thus, the compensation from the payments is not as large as the gross number. The payor is partially reimbursed, and the recipient loses part of the payments in taxes. Because the paying spouse is often in a higher tax bracket, the amount of money saved from the tax deduction is often greater than what is paid in taxes.

New Law

The proposed tax reform, which would affect divorce cases moving forward, would eliminate taxes from the spousal maintenance equation. Initially, this seems like a win for spouses receiving maintenance because they get to keep the entirety of their support payments. However, paying spouses would be less likely to agree to maintenance. Unlike child support, spousal maintenance is not guaranteed during a divorce:

• Spouses may agree to maintenance during negotiations: or 
• A court may grant it if a spouse is unable to support him or herself.

The tax deduction is an incentive for the paying spouse. Courts will also consider it when making their decisions. Without the deduction, courts may lower the amount they award in maintenance payments. In order for the payor to receive the same savings as with the tax deduction, the payments would need to be reduced to a lower amount than what the recipient would have kept after taxes.

Long-Term Outlook

Before you worry, remember that these are only proposed changes to spousal maintenance taxes. The tax reform bill may fail to pass or be revised along the way. A Kane County divorce attorney at Goostree Law Group will be prepared for any legal changes related to divorce. To schedule a free consultation, call 630-584-4800.

Source:

https://www.cnbc.com/2017/11/10/is-tax-reform-the-final-straw-for-alimony.html