Alimony tax deduction in divorce may cease to exist

Alimony tax deductionIn many divorce cases, spousal support (also known as alimony in some states) is a key issue in dispute. One party might feel as if they are unable to meet their reasonable needs without spousal support. They might claim the other spouse has the ability to help them.

Exactly how this works can vary by state. Each state has their own state statute that deals with how spousal support is determined in a particular state.

Generally speaking, however, courts look at the income and reasonable expenses of both parties. They also look at factors like the length of the marriage, the education of the parties, the standard of living during the marriage and, in some states, the conduct of the parties during the marriage.

Spousal maintenance or alimony cases can become quite contentious. In many cases, the parties end up trying the case because they cannot come to an agreement. In some instances, a party might end up paying spousal maintenance for a long period of time or even indefinitely until death, remarriage or a change of circumstance of a substantial and continuing nature.

But one key feature that has been in existence for a very long time is the way spousal maintenance works for tax purposes. Under current tax law, the party receiving spousal maintenance includes the amount they receive on their taxes income. The party paying spousal maintenance then gets to deduct the amount they pay from their income on their tax return.

The way spousal maintenance is treated for tax purposes results in many parties being able to settle their divorce. This is because spousal maintenance can often seem more palatable to the payor spouse if they can deduct the amount from their income for tax purposes.

However, under a current tax bill that is being debated in Congress, that alimony tax deduction stands to go away. In other words, if the current tax reform bill passes and is signed into law by President Trump, for parties who divorced or separated after 2017, the alimony tax deduction will no longer exist.

This means that the payor spouse of spousal support will no longer be able to deduct the amount they pay on their taxes. This would be a significant development in the way divorce cases work throughout the country.

For example, parties who used to be willing to pay spousal support given that they can deduct it on their taxes, may no longer be willing to do so. This could inevitably result in more divorce cases going to trial versus settling. Ultimately, this could result in divorce cases taking longer and costing more in fees. It also results in the payor spouse in divorce paying significantly more in taxes.

The view of some is that this change might give the higher earning party some pause before filing for divorce. But is it really realistic to believe that a party in an unhappy marriage will choose to stay together because of a change in the tax law?

Further, it is not always the higher earning spouse that files for divorce. What if the lower-income party choose to file for divorce versus the higher income party?  Doesn’t this just make finances worse for a party who does not even want a divorce?

Nonetheless, it will be interesting to see if this tax bill becomes law. If it does, it will certainly have a significant impact.

If you are going through a divorce where you have a concern about taxes, Stange Law Firm, PC can help. You can call us at 855-805-0595.

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