How Tax Reform Could Dramatically Impact Divorce

tax reform divorceIf the GOP’s proposed tax plan passes, divorce could unfortunately get a lot more expensive for some individuals.

Buried in the 429-page House Republican tax bill is a provision that might be construed as “pro-family” but in reality is more anti-divorce. The Tax Cuts and Jobs Act would change the treatment of alimony quite drastically.

Currently, ex-spouses paying alimony can deduct their payments from their federal income taxes and the person receiving the payments must claim the money as taxable income. The proposed bill would kill that deduction and flip the arrangement, which would have a major impact on divorce agreements.

Not only would alimony no longer be deductible for the payor, but it would also be tax-free for the recipient. Effectively, this would increase the total amount of taxes divorced couples pay since the ex-spouse paying alimony, typically the husband, is usually the one with a higher income and thus in the higher tax bracket.

The Tax Cuts and Jobs Act would change the treatment of alimony quite drastically. Click To Tweet

Ramifications of the bill

Congressional tax writers expect the change to generate an extra $8.3 billion for the government over the next decade. The bill summary for the tax plan argues that it eliminates a tax incentive that encourages couples to divorce:

“The provision would eliminate what is effectively a ‘divorce subsidy’ under current law, in that a divorced couple can often achieve a better tax result for payments between them than a married couple can.”

However, that is only true for couples with comparable incomes, and if you and your ex make about the same amount then it’s unlikely that there is a substantial alimony payment between you two anyway. The spouse who makes much more than the other and pays a significant amount of alimony is basically hit with a divorce tax penalty.

On the surface, this obviously impacts the payor, but some experts speculate that the spouse receiving alimony could also take a financial hit. Getting rid of the deductible will likely limit the payor’s ability to pay alimony since they’ll still be paying fixed expenses such as child support and judges factor tax deductibility and taxable income of alimony into their decisions.

Bottom line, the change would most likely result in less money to go around to support each of the two households.

Cordell & Cordell understands the concerns men face during divorce.

Ongoing problem of spousal support

This tax reform bill would just be the latest change to a spousal support system that seems to be in constant flux.

The system was originally based on an early English model of alimony, which stemmed from coverture laws that required women to transfer all their assets and rights to own property to their husband upon marriage while the husband was required to support her financially.

Until fairly recently, permanent alimony was the norm, but that’s largely been done away with (with a few exceptions) as more women have entered the workforce.

Many flaws still exist within the system. Spousal support is frequently abused. Although it typically ends upon remarriage, it doesn’t always terminate upon cohabitation, which discourages a spouse from remarrying in order to continue receiving payments. And in some situations, the system establishes a welfare state for the recipient while diminishing the desire to work for the payor since an increase in income can potentially result in an increase in support payments.

The system’s greatest flaw, however, is that it often prevents a clean split between the two divorced spouses and keeps them from truly moving on with their lives.

If you fear you might be paying more alimony than you can afford, you might be able to modify the amount. If you have any questions about alimony or spousal support, contact a family law attorney.

End of Content Icon

2 comments on “How Tax Reform Could Dramatically Impact Divorce

Leave a Reply

Your email address will not be published. Required fields are marked *