The tax plan proposed in the U.S. House of Representatives this last week (The Tax Cuts and Jobs Act) would eliminate the deduction for support alimony payments ordered after 2017. The policy change would not impact alimony obligations ordered prior to 2018, creating immediate urgency for those facing an alimony award in their pending divorce.
Spousal support payments, otherwise known as alimony, are based on one party’s need and the other party’s ability to pay. Alimony is intended to be a reasonable allowance for the maintenance of the party in need and each award of alimony depends on the unique facts and circumstances fo the case. It is intended to cushion the transition and adjustment to gainful employment.
Alimony is currently deductible to the payer and taxable to the recipient, making the payment of alimony easier to stomach for the obligor. As a divorce attorney, the tax deduction available to the obligor is an important tool available during settlement negotiations. The tax ramifications can often make the difference in reaching resolution of a matter when alimony remains the sticking point. The elimination of this benefit is likely to impact divorce negotiations and prolong litigation.
The Republican tax plan is far from becoming law at this stage, but the proposal to eliminate the support alimony deduction should be considered in pending divorce matters where alimony is at issue. If it is likely that alimony will be awarded in the case, it benefits the payer of alimony to resolve the matter before the change in the tax code becomes law. A tax-deductible alimony settlement today at a higher amount may be of much greater net benefit to the obligor than a lower amount at a later date with no tax deduction.
What remains unclear is whether the alimony payment will continue be taxed on the recipient if it is no longer deducted by the obligor. If it continues to be taxed this would tax the same dollar twice, reducing the amount of support available to the family. Furthermore, moving the tax on alimony back to the obligor will likely tax the income at a higher rate since the obligor is often taxed at a higher rate than the recipient.
Regardless of the intent behind the proposal, moving the tax obligation back to the alimony payer will likely result in prolonged divorce litigation and limit the amount of support available to the recipient who needs it most. Taxing alimony payments at the obligor’s tax rate reduces the net amount available to the recipient creating a lose-lose for both obligor and recipient.
If you are facing a divorce in which you anticipate alimony being an issue in your case, an experienced family law attorney can help you evaluate this matter. The family law attorneys at Smith Simmons are prepared to help you evaluate this issue before the end of 2017. Call (405) 843-1000 to discuss this issue with a family law attorney today.