Tax reform efforts if enacted into law could affect how alimony and maintenance payments are treated for federal tax purposes. Under H.R. 1 the Tax Cuts and Jobs Act which was passed by the House of Representatives on November 16th, the payor spouse would no longer receive a deduction for alimony and separate maintenance payments made. Also, the payee spouse would not be required to treat these amounts received as taxable income.
The treatment of child support payments is unchanged by H.R. 1.
This change could cause a difference in the overall tax assessed on the payments if the payor and payee are not in the same tax bracket. If the payor is in a higher tax bracket, more of the overall payment will be taxed; however, if the payee is in a higher tax bracket, less of the overall payment will be taxed.
The proposed law would apply only to divorce instruments that are either enacted after December 31st, 2017 or if enacted on or before that date are modified to expressly state that these taxability changes apply.
The Senate's version of the Tax Cuts and Jobs Act as recently voted out of the Senate Finance Committe however makes no reference to any changes in the treatment of alimony and separate maintenance payments. The Senate is scheduled to take its version up for vote after Thanksgiving.
This difference between the tax reform bills in the House and Senate highlights the fact that there are still many items which will ultimately have to be decided as part of the reconciliation process before a final bill can be presented to both houses for final vote.
Whether this change in tax treatment of alimony and separate maintenance payments ultimately makes it in to law still remains to be seen. Family law attorneys will want to proactively consider what these changes may mean for their clients if enacted and how this may alter the manner in which agreements are negotiated and structured.
Author: Paul Morrow, Manager | DHG Tax