Eliminating the alimony deduction, what?
Randy Kessler
Family Law Attorney, Media Contributor, Emory Law Professor, LinkedIn Influencer (400k followers)
I was asked by the Daily Report, the legal newspaper down our way to write my thoughts about this part of the newly proposed tax plan. Here's what I wrote:
If the new tax plan actually does that (eliminate the alimony deduction), as is being suggested, what a whirlwind it will create. Let’s start with the fact that it will remove one of the biggest incentives for the high earning spouse going through a divorce to offer to support the non-earning or low-earning spouse. Currently the high wage earner can pay alimony and deduct the payments, at their high tax bracket level, while the recipient pays taxes on it, at their low tax bracket level. The family saves money and dollars shift from the wealthier to the less wealthy. That is generally a good thing.
News reports say the change would be effective for agreements and orders entered after 2017. But those in the midst of negotiations should raise their antennas. This could be a true game changer.
When most high earners ask me about settlement, rarely are they interested in paying alimony … until I explain that it can be deductible. Eyes light up. All of a sudden the idea of “I will not pay her/him one red cent of alimony” becomes “can we make the whole settlement alimony?” People begin to think creatively about how to resolve their case. And that is a good thing.
So while the country may save a few dollars this way (not a lot, because taxes are already being paid on these amounts, but now they will be paid at a higher rate since the payor will be paying taxes on the money he/she earns, and not deducting it, and then paying alimony with after-tax dollars), the real losers will be the dependent, non-monied spouses who could really use the support, since many payors will now be less likely to agree to pay alimony, if they lose the ability to deduct it. In fact, those folks who need support may now need more government help if they lose alimony. Wouldn’t we prefer that the support came from their former spouse? And with 50 percent of all marriages ending in divorce, that may be a heck of a lot of people losing much needed support. Let’s not forego this unique incentive for the higher wage earner to help.
Owner, Law Office of Robert Ricci, Jr.
7 年As a divorce lawyer I see this as a bad thing — it makes cases more difficult to settle. The reason is that it eliminates having the federal treasury contribute to the settlement. As a taxpayer I see this as a fair way to eliminate the federal government subsidizing divorce settlements. The manipulation of support awards to create more alimony has always seemed wrong. It's almost a financial bonus to get divorced in some situations.
Leveraging tech to improve financial outcomes
7 年Vera RUDA I would argue that this change is in alignment with what is supposed to be a conservative agenda. If it is more expensive to end your marriage than maybe you think twice about it. I'm not saying that will actually be the result, but rather that I'm sure that is how it was sold to the GOP base that claims to be family first, and honestly it makes sense from that simple perspective. Make something more expensive and people are less likely to do it. Randy Kessler argues folks will be less likely to help their former other half, but maybe it will make them less likely to create a former other half in the first place. Note:. I've never been involved in those conversations but rather I'm basing my comment on people being economically rational in the aggregate. The number of tax credits/deductions and the ripple that changing them creates is absolutely astonishing sometimes.
Tax Director at CBIZ MHM, LLC
7 年This deduction (pre - AGI) was adopted in WWII, when marginal rates were up to 94%. Without the deduction, a taxpayer who paid a significant alimony could end up with no funds after paying the alimony + the tax.
Attorney at Law
7 年Domestic courts don't consider the tax consequences of alimony; so, this could be interesting.
Partner at Wood & Meredith, LLP 15M Contacts
7 年It might be eaiser just to ban marriage (tongue in cheek).