Divorce and Family Law Partner Morgan L. Stogsdill Outlines How Republican Tax Proposal Seeks to Eliminate Alimony Deductions

PROPOSED REPUBLICAN TAX LEGISLATION, THE “TAX CUTS AND JOBS ACT,” WILL ELIMINATE ALIMONY (MAINTENANCE) DEDUCTIONS, THROWING DIVORCE SETTLEMENTS AND FINANCIAL NEGOTIATIONS INTO UPHEAVAL.       

Proposal by GOP:

On November 2, 2017, the House Ways and Means Committee unveiled H.R.1, better known as the “Tax Cuts and Jobs Act.” While both the House and Senate have passed the bill, it was not initially the same bill. Instead, each had its own deductions, costs, and proposed brackets.

Now, after approval from a House-Senate Conference Committee on December 15, 2017, the Act is closer than ever to presentment to the president, and becoming law – just two votes, and a signature away, in fact! And, with a timeline tracked to wrap up negotiations before Christmas, the proposed changes to the law are setting in as an almost imminent reality. One provision that remains of particular concern in family law is Section 11051, which would repeal Sections 71 and 215 of the Internal Revenue Code that currently provides for alimony payments to be tax deductible to the payor and taxable to the recipient. The reason? It has been, and still remains, a “trouble spot for the IRS.”

Current Law on Alimony/Maintenance:

Under current law, alimony payments are considered above-the-line deductions for the payor, and the payee must pay taxes on the payments received. Because most payees are taxed in lower income brackets than payors, this traditionally meant greater tax benefits for the payor, more money for the payee, and less money for the government in the form of taxes. Although this tax concept is sometimes difficult to understand, the ability to take advantage of this tax break is financially advantageous for a divorcing family.

New Proposal regarding Alimony/Maintenance:

Contrast this with the new proposal: alimony payments will no longer be deductible by the payor, or includible in the income of the payee for any divorce or separation agreement executed after December 31, 2018. This would essentially shift taxation from the payee to the payor, posing serious implications for divorce settlements and negotiations.  The change to the alimony/maintenance law would effectively throw divorce settlements and negotiations into total upheaval. Although the GOP proposes that this law would not affect any maintenance settlements made prior to the entry of this law, the effect on reviewable or modifiable maintenance (maintenance that is reviewed by a court after a period of time or modified upon a substantial change in circumstance) has yet to be determined.

Differing Arguments & Interests

To completely understand the ramifications under this new proposal, one must contemplate the varying interests and arguments from the following groups:

Married Couples:

For married couples, the GOP proposal makes sense. Under the old law, separated or divorced spouses were essentially receiving what many refer to as a “divorce subsidy” for support paid, whereas married couples that also support one another could claim no such benefits. Such is the reasoning for the non-deductibility of other forms of support, like child support, which is essentially the model for the new alimony tax structure.

The Government & IRS:

From the government’s perspective, there’s another huge benefit to the new proposal: the provision, according to the Joint Committee on Taxation (JCT), would increase revenues by $8.2 billion between 2018 and 2027.  Sounds great, right?! But where the money is used and whether that money will benefit the person who lost the tax deduction, is yet to be known.

Divorcing/Separated Couples and Families:

First, and most prominently, the new provisions would disadvantage the spouse receiving alimony payments, along with the spouse ordered to pay alimony. Specifically, courts would be hard-pressed to award the same amount in alimony knowing that the payor could not deduct the payments from his or her income. Because less would be awarded, payees will automatically receive less in support and have to pay taxes on said support. Thus, while the government benefits from the new proposal, earning more revenue from alimony taxes paid by spouses in a presumably higher tax bracket, payors will no longer receive a tax benefit and payees will receive less available cash.  Lastly, there will be less cash to go around but now two households to support, which will be detrimental to the children of the marriage, if any.

Recap and Timeline for Implementation:

The Tax Cuts and Jobs Act is close to being the new law of the land, and is set to affect maintenance beginning for all divorce decrees or separation agreements executed on or after January 1, 2019. While this means the new provisions aren’t of immediate concern – after all, they still aren’t going to take effect for another year – it is important to understand the implications now as the law creeps increasingly closer to passage! This is particularly true of those with reviewable or modifiable maintenance, as any divorce decrees or separation agreements executed before January 1, 2019 will also be subject to the new rules, but only if the modification order expressly provides that the new amendments apply to the modification.