By: Megan S. Murray, Esq.*
The recently proposed tax reform legislation includes sweeping changes in the current tax law for both individuals and corporations. The proposed legislation, which has recently been passed by the House, would bring about the biggest overhaul of the U.S. tax system in the past 30 years.
Of particular interest to family law attorneys is Section 1309 of the House Bill, which would eliminate the deductibility of alimony for alimony payors. Under current law, individuals who pay alimony to his or her spouse can deduct those alimony payments from their total income for tax purposes, resulting in what could be a significant reduction in taxes for the payor. Conversely, the recipient of alimony claims alimony received as income, thereby paying tax on alimony payments received. The current proposed modification to the tax law would apply to all settlement agreements or court orders including payments of alimony, which are entered after December 31, 2017. However, as alimony is typically modifiable based on future changed circumstances—wherein alimony would be reviewed anew and, thereby, subject to the proposed tax legislation—even alimony awards fixed prior this date could be impacted by the prosed legislation. In short, anyone paying or receiving alimony, regardless of when the original alimony obligation was established, needs to be mindful of how the proposed legislation may impact upon them.
The deductibility of alimony for the payor can often be critical in settling the issue of alimony. The payor may agree to pay more support to the alimony recipient based solely on the understanding that these additional payments will ultimately result in an overall reduction in his or her income taxes. As the alimony recipient is almost certainly going to be in a lower tax bracket than the payor, the detrimental tax impact on the recipient in claiming alimony payments as income is less than the benefit to the payor in deducting alimony paid. Indeed, by shifting the income tax burden from the payor spouse to the payee spouse, it can result in an overall tax savings to increase cash flow to divorcing families. This can be extremely important, given the fact that when parties divorce, one set of household expenses turns into two separate sets of expenses.
The pending legislation could certainly impact upon settlements in divorce matters where alimony is an issue. Indeed, the deductibility of alimony is often the single motivator for the alimony payor to enter into an agreement to pay the additional support needed by the payee to cover his or her living expenses. If settlements cannot be reached, it will likely result in the proliferation of litigation in these matters—forcing judges, with dockets that are already oversaturated, to take on additional cases. Judges, like attorneys, will have to deal with looking at alimony in an entirely different light—noting what could be a vastly different financial impact on the payor and payee spouse based on the amount of alimony awarded.
Individuals who are going through a divorce or considering divorce should consult with an attorney about the potential the impact the pending tax reform legislation could have on their matter based on the unique facts of their case.
*Megan S. Murray, Esq. is a partner at Paone, Zaleski & Murray. Ms. Murray manages the firm’s Red Bank office. She is a member of the American Academy of Matrimonial Lawyers; and Certified by the Supreme Court as a Matrimonial Law Attorney