How does the New Tax Plan Impact Alimony in the United States?
The new tax plan called Tax Cuts and Jobs Act will be having a significant impact on spouses or former spouses paying alimony in the United States. Any spouse paying alimony to their divorced spouse can no longer claim any deduction for the amount. Till now, alimony was a deductible expense unless it was specifically for child support in which case it was treated as a personal expense and hence not deductible. Any financial transaction following the sale of any joint asset such as marital property was also not deductible and it continues to remain taxable.
The change in the tax law will prove to be costly for Americans that would get divorced after 31 December 2018. All divorces executed before the end of the year will still qualify for the deductions, but any new divorce will be excluded. In other words, couples who are contemplating divorce should wrap up their negotiations and court proceedings if applicable by the year-end. Else, the alimony payer will be losing substantial money. Alimonies are usually hefty payments if the recipient spouse is unemployed or totally dependent, at least financially. Naturally, the deduction is also substantial. Paying a standard income tax according to the rate given the income on an expense that has no financial reward for the alimony payer is going have a ripple effect in personal finances.
The same tax plan has brought in another change. Till now, recipients of alimony must report the money received as income and they must pay a tax on that. The new tax plan makes this a nontaxable income. Recipients of alimony don’t have to pay any taxes on the sums they receive, and they don’t need to report it in their taxable income. This may seem to be a strange turn of events and a quite unreasonable reform for many, especially those who pay alimony. However, the reality is not as simple as black or white.
There have been many cases, especially among the more prosperous Americans, wherein the spouse paying the alimony has chosen to pay substantially more than they would if there was no deduction. This helps the recipient spouse as well since they get more money than they would otherwise be offered. However, the recipient spouse must pay tax on such alimony. It remains debatable if such practices are healthy from a purely economic and taxation point of view.
The government still earns taxes, either by charging the recipient or by eliminating the deduction for the spouse paying the alimony. What doesn’t make rational sense is the fact that the government is choosing to compel honest taxpayers who may already be reeling under the pressure of making alimony payments to have such an expense not deducted from their taxable income. The potential impact on the government coffers is not clear yet. The impact on alimony payers is lucid. They would be hard pressed and will be paying considerably more tax than they would have with the prevailing tax plan.