On behalf of Mohajer Law Firm, APC posted in divorce on Wednesday, December 20, 2017.
The latest version of the tax bill under consideration in Congress eliminates the deduction for alimony payments and may also have other consequences for couples undergoing divorce. Many lawyers believe that these proposed changes will add time and expense to this process and can harm the validity of prenuptial and postnuptial contracts.
A spouse pays alimony to their former spouse who usually earns less money. These payments are separate from child support, which helps pay for the expenses of raising children. The payer spouse can deduct alimony payments under current law. These are taxable as ordinary income for the recipient spouse. Because the recipient spouse is taxed at a lower bracket, more money is kept within the family and excluded from taxes.
This helps expedite settlements, because there is more money to be allocated among the spouses. Eliminating this deduction lowers this amount and decreases the likelihood of a successful or quick settlement.
In turn, this can lead to more expensive litigation. While wealthier couples can afford the loss of this deduction, less-affluent couples will face difficulties with their quality of life by losing the anticipated $200 to $300 per month.
If passed the bill will not affect divorces effective before January 1, 2018, and will not eliminate the deduction that paying spouses now claim. However, many couples of all income levels who entered prenuptial agreements and post-nuptial agreements may face uncertainty.
These agreements were negotiated well before the divorce and usually contain terms that were negotiated and drafted with the belief that alimony is deductible. This belief may have had an impact on the compromises made by the parties in these agreements.
A spouse undergoing divorce should seek legal advice to help plan for its potential financial and tax consequences. An experienced family law attorney can help seek a decree that protects a person’s financial security.