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Tax bill could hit alimony recipients

Tuesday, March 20, 2018

New tax reform legislation before Congress, the Tax Cuts and Jobs Act, may end the deduction that federal taxpayers receive for making alimony payments to their former spouses. If enacted, the law could change divorce proceedings, property division and settlement negotiations in Texas and throughout the country.

Taxing spousal support could lower alimony payments because money intended for this support will go to the federal government instead of the former spouse. This could impact divorce agreements and recipient spouses, where the alimony payments are spelled out, after 2017.

Spousal support is usually ordered if there is a big difference in earnings between the spouses and the marriage lasted for a few years. Child support are separate payments from alimony and is ineligible for deduction.

The payer of alimony may claim it as a deduction while the recipient must report it as income under the current law. An estimated 598,888 taxpayers claimed the alimony deduction on their Form 1040 for over $12.3 billion in 2015, according to the Internal Revenue Service.

This deduction, however, has posed some problems for the IRS. There were large differences between the amounts claimed as deductions and reported as income, according to a 2014 U.S. Treasury Report. The Treasury found that over 500,000 taxpayers claimed alimony deductions for over $10 billion in 2010 while recipient's report spousal support income that was $2.3 billion less for that year.

The new legislation, as currently drafted, would transfer a good part of the tax obligation from the alimony recipient to the payer. The difference in tax rates would have a negative impact on spouses who receive this support.

Spouses who receive this support would suffer these consequences because they earn less. Accordingly, they are in a lower tax bracket and have a smaller tax liability. Courts, attorneys and divorce planner rely on this when making decisions on property division. If alimony payments lose their deductibility, lower support payments may be ordered.

An attorney can help provide different options on spouses undergoing divorce and facing these financial challenges. A lawyer can help assure that they seek a decree that addresses their financial needs.

Source: USA Today, "Divorce penalty? Tax reform could shrink alimony for ex-spouses," By Sarah O'Brien, CNBC, Nov. 4, 2017

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