Alimony will now be taxed under GOP bill
(CNN Money) — Breaking up is hard to do. But the GOP tax bill could make it even harder, divorce lawyers say.
The final version of the tax plan, which was released Friday and is set for votes next week, eliminates the tax deduction for alimony payments. Divorce lawyers say this move could make ending marriages an even more drawn-out and expensive process, and the change could be particularly painful for lower-income couples.
Alimony payments, typically codified in the terms of a divorce settlement, are separate from child support. They are the payments that someone gives to an ex-spouse who earns less money.
If the tax bill becomes law, the alimony deduction repeal would affect divorces carried out after December 31, 2018. The new rule wouldn’t affect anyone already paying alimony.
But it’ll mean big changes for divorce proceedings in the years ahead.
Right now, alimony payments are tax free for the payer, and they’re taxed like regular income for the recipient. Since the recipient usually makes less money — and is thus in a lower tax bracket — it keeps more money in the family unit and away from Uncle Sam.
The IRS says that about 600,000 Americans claimed an alimony deduction on their 2015 tax returns, the most recent year for which data is available.
Divorce lawyers “use this tax deduction as a way to make a settlement go down easier — because there was more money in the pot to be able to split up,” said New York-based divorce attorney Lisa Zeiderman. Without the deduction “there’s less money to go around,” she said.
Eliminating the alimony tax deduction may also have plenty of spillover implications, complicating how child support is calculated and how assets are divvied up, Zeiderman said.
That could make divorce settlements much more difficult to reach — “which means more litigation, which is more money in terms of legal fees,” she said.
Christopher Melcher, a California-based divorce lawyer, said the move could be particularly difficult on lower-income couples.
Wealthy people can usually afford higher taxes on alimony payments, he said. “It’s the people with limited means where $200 or $300 dollar per month is going to make a big difference in their lifestyle and quality of life. That’s a car payment, that’s meals.”
Malcolm Taub, a divorce attorney based in Manhattan, agreed. Most of his clients are upper middle class and above. He doesn’t think the elimination of the deduction will play a big role in negotiations. “I don’t anticipate this to be a big deal at all,” he said.
It’s not just future divorces that will be affected by the tax deal — couples working out prenuptial agreements should take heed, said Michael Beyda, another New York based divorce lawyer.
He said prenuptial — and postnuptial — agreements typically contain clauses that outline what alimony would look like should the couple get divorced. Until this point, those clauses have typically been drafted assuming the alimony tax deduction will be in place.