New Tax Bill Would Remove Tax Deductibility of Alimony Payments

ALIMONY, FINANCIAL LITERACY

Andrew Hatherley, CDFA®

November 7, 2017

The Tax Cuts and Jobs Act, announced on November 2, includes a provision which would eliminate the deduction given to those taxpayers who make alimony payments, also called spousal support.

Under current rules, alimony payments may be deducted from the payor’s taxable income. The recipient pays income taxes on their alimony income. Because payors are often in a higher tax bracket than the recipient – the majority of which are women – divorcing couples can save money on taxes by shifting the tax burden to the lower earner.

For example, if the ex-husband is paying $3,000 in monthly alimony and is taxed at a 33% rate, the support is actually costing him $2,000. Let’s say the ex-wife, receiving the $3,000, is in the 15% tax bracket. She would pay $450 in taxes, effectively receiving $2,550. With the proposed elimination of the deduction, providing the ex-wife with the same level of support would cost the ex-husband $550 more each month.

“If the deduction goes away, it would affect divorce agreements entered into after 2017.”

The likely bottom line is that alimony recipients, although no longer paying tax on the alimony they receive, are likely to be hurt as Uncle Sam takes a bigger bite out of the overall divorce pie, leaving less money available to divorcing couples to factor into their settlement negotiations.

If the deduction goes away, it would affect divorce agreements entered into after 2017.

Child support payments, which are separate from alimony, are not tax deductible.

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Andrew Hatherley is NOT AN ATTORNEY AND DOES NOT PROVIDE LEGAL ADVICE. All information he provides is financial in nature and should not be construed or relied upon as legal or tax advice. Individuals seeking legal or tax advice should solicit the counsel of competent legal or tax professionals knowledgeable about the divorce laws in their own geographical areas. Divorce planning is a fee-only process that does not involve investment advice or securities or insurance transactions.