Call it a popular tax break you didn't know you might lose, or a divorce penalty, but the new tax bill could include some bad news for those paying alimony. The GOP plan released last week contains a slew of changes to the tax code, many that might not make the headlines, but that still make a big difference to a lot of people's finances.
One of those proposed changes would be removing spousal support or alimony as a deductible expense. What does that mean for divorced couples? Here's a look.
Past and Present
As it stands now, alimony is tax deductible for the ex-spouse paying the alimony, and is classified as taxable income for the ex-spouse receiving the alimony payments. The new tax bill would remove the alimony deduction for those paying alimony, but those receiving it would no longer need to pay tax on that income.
Congress apparently looks at the current way alimony is taxed as a "tax subsidy." The bill summary reads: "The provision would eliminate what is effectively a 'divorce subsidy' under current law, in that a divorced couple can often achieve a better tax result for payments between them than a married couple can."
The change would take effect for divorce and separation agreements executed after 2017 and any modifications to current agreements agreed to after that date as well. Forbes reports that people pay about $10 billion in spousal support each year, but the proposed the change is only expected to raise $8 billion over the next ten years.
Exes and Taxes
But would the impact be more immediate for divorcing couples? Probably. The change will likely increase the total amount of tax paid by divorced couples, as the ex-spouse paying the alimony "is normally the one with the higher income and who faces a higher tax bracket," according to Business Insider. A couple with $100,000 in shared income could end up paying 35 percent more in taxes if they get divorced under the new tax plan.
While tax deductions are certainly not the basis of a divorce, they are definitely a consideration for divorced couples. So if you're going through a divorce, talk to an experienced tax attorney about how divorce and the new tax plan may affect your filing.
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- The Tax Bill's Fine Print: Tuition, Medical Expenses and Alimony (The New York Times)
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- Spousal Support and Taxes: 3 Reminders (FindLaw's Law and Daily Life)