The New Federal Tax Laws and Alimony
On December 22nd 2017, the new tax laws provided by Congress to the President were signed into law. Prior to the enactment of this new law the treatment of alimony payments over the last 75 years was described in IRS Publication, Topic Number:452-Alimony. The “Amounts paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) may be alimony for federal tax purposes. Alimony is deductible by the payer spouse, and the recipient spouse must include it in income.” The IRS Publication goes on to define and describe what is, and is not alimony. For purposes of the new law the same definitions of alimony are expected to hold.
Under the new tax laws the rule for the tax treatment of alimony has dramatically changed. The rules now state that the payer of alimony is no longer able to take a deduction for the amounts paid. Further, the recipient no longer has to include the alimony as income, and therefore, is no longer required to pay Federal income tax on the alimony received. The new law does not change the current treatment for alimony currently being paid. Moreover, the new tax treatment of alimony does not change the treatment of alimony for anyone who signs a separation agreement or who divorces before January 1, 2019. In those cases the old long established tax treatment will apply.
In general only a very small percentage of individuals pay or receive alimony. The Internal Revenue Service reports that only 361,000 tax payers claimed that they paid any alimony in 2015. For the same reporting period only 178,000 reported that they received it. The discrepancy in reporting continues to be a thorn in the side of the IRS. The rational provided by the House Ways and Means Committee for changing the tax treatment of alimony was that the alimony deduction was a “divorce Subsidy” in which “a divorced couple can often achieve a better tax result for payment between them than a married couple can.” An additional more realistic effect of the new tax treatment of alimony is that it will result in more tax revenue than the existing treatment thereby helping to pay for other tax cuts contained in the new law.
In effect the new tax treatment is expected to cost divorced families more income tax as the party usually paying the alimony is earning more money and subject to higher income tax treatment and the party receiving it is usually earning less money and in a lower tax bracket.
The issue that may now develop for divorcing parties where the imposition of alimony is expected is how quickly they will proceed. A payer spouse may want to proceed as fast as possible to have the alimony begin before the new tax treatment on January 1, 2019, thereby preserving its deductibility. The receiving spouse may want to proceed very slowly, so that the new tax treatment happens before the alimony begins , so that there is no income tax on the alimony received.
This once again seems to define the “law of unintended consequences”! It may lead counsel to proceed in ways they would not ordinarily proceed, so that they can obtain the most beneficial results for their clients. Based on nothing more than timing of the proceedings. It will be interesting to see how the bench will enforce the rate of proceedings.