Alimony Tax Cuts Hit Hard

On November 2, 2017, Chairman Kevin Brady (R-TX) of the House Committee on Ways and Means released a tax reform plan, known as the House Tax Cuts and Jobs Act. The plan would reform the individual income tax code by lowering tax rates on wages, investment, and business income; broadening the tax base; and simplifying the tax code. The plan would lower the corporate income tax rate to 20 percent and move the United States from a worldwide to a territorial system of taxation. Some tax breaks that would be eliminated include student loan interest, tuition, medical expenses, and alimony payments.

Under the current law, the person paying the alimony gets a deduction in taxes and the recipient claims it as income and pays taxes on it. If this Act is passed, it would eliminate the deduction given to those taxpayers who make alimony payments or spousal support. The new tax legislation essentially would shift much of the taxation from the recipient to the alimony payer. If it is passed, it would make divorce a bit more burdensome for the ex-spouse who paid alimony making it no longer a deductible expense. But the party receiving the payments would no longer need to pay tax on the income received. The change would take effect for divorce and separation agreements executed after 2017.

So if you are ordered by the court to pay your ex-spouse $2,500 in spousal support each month, you will being paying closer to $3,000 without the tax cut. The recipient will now get $2,500 a month tax free income. Other noteworthy information is that the recipient will not be taxed on their spousal support under the proposed legislation. This will dramatically affect divorce cases that involve spousal support obligations.

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This information is provided for information purposes only. It is not legal advice and does not constitute an attorney-client relationship. The attorneys of McDonald Law Group are licensed to practice law in the State of Nevada. The attorneys of McDonald Law Group are not licensed to practice law in any state other than Nevada.