As with any proposed federal legislation, the recently unveiled Tax Cuts and Jobs Act is complex and lengthy. Piercing that veil has already revealed that with every benefit to efforts to reform, there are drawbacks. Some taxpayers will see relief while others will carry a heavier financial burden.
Divorced couples currently negotiating alimony agreements could suffer negative effects if the current bill becomes law, regardless of who pays and who receives support.
Alimony is necessary when a large income disparity exists between two divorcing spouses ending a marriage that lasted for many years. That financial discrepancy often becomes a hotly disputed aspect of most marital dissolutions. However, the one benefit of the financial obligation involves deducting the amount of support paid in.
Current law allows payers to deduct and requires recipients to claim it as income. However, a provision in the proposed tax reform bill would effectively eliminate the ability to write off support, creating a domino effect for both payers and recipients.
According to the Internal Revenue Service, approximately 598,888 taxpayers claimed alimony deductions in 2015, totaling $12.3 billion. A 2014 report revealed that the 500,000-plus payers deducted more than $10 billion in 2010. Yet, ex-spouses receiving payments claimed income of only $7.7 billion, representing a significant disparity.
Recipients are commonly in a lower tax bracket than payers, a consideration when assets are being divided during the divorce process. If the Tax Cuts and Jobs Act is enacted as currently written, those paying alimony will find themselves with less money that would go toward supporting their spouses. Instead, it will fill the federal government’s coffers
