Killing Alimony

By | 2017-11-09T21:32:08+00:00 November 9th, 2017|Alimony, Divorce, Divorce & Finances|0 Comments

Eliminating the deductibility of alimony payments from taxable income is one of the features of the Republican House Tax Reform bill. It is very significant to both payors and recipients of alimony.

Currently, payors can deduct their alimony payments from their taxable income. As a result, they reduce their taxable income and their income taxes. On the other hand, recipients include alimony in their taxable income. In general, there is a difference in the tax brackets of the two (recipients usually have a lower tax bracket than payors). As a result, divorcing couples can often save money on income taxes by placing the tax burden on lower earners. With that saving, they may be able to better afford the expenses of divorce.

Eliminating the alimony deduction will not generate a lot of tax revenues. According to the House, the provision will only raise about $8 billion over 10 years. While, the bill increases taxes on alimony payors it also decreases taxes on recipients. For recipients, alimony income would no longer be taxable.

This change in taxes should have a strong impact on divorce agreements. For many payors, saving on income taxes on alimony payments is the saving grace that comes with making alimony payments. According to John Fiske a prominent family lawyer and mediator in the Boston area, “alimony is the greatest tax deduction ever”. Without the tax deduction, alimony payors will find it much more expensive and more difficult to agree to pay.

For instance, alimony payors in Massachussets often pay between 30% and 35% of the difference in the spouses’ income. For a payor in the 33% federal tax bracket, the House Tax Reform bill increases the cost of alimony by nearly 50%.

State laws, guidelines and practices around alimony are largely based on payors’ ability to deduct it. Should the alimony provision of the House Republican Tax Reform survive, it may well lead to a race in the states to amend alimony laws to decrease alimony payments. Even though recipients would no longer include alimony in taxable income, it is likely to reduce their income even more. As a result pre and post divorce financial planning that helps both parties to recover financially from divorce is more important than ever.

 

About the Author:

Chris helps individuals and families plan difficult life transitions such as retirement and divorce.As a qualified fiduciary fee-only planner, Chris is committed to give individuals and couples financial advice that is in their best interest, supplementing legal advice from family lawyers.Chris helps individuals and couples piece together the various elements of their financial lives, from income and expenses, to assets and debt. He helps clients evaluate the financial impact of settlements, both for the short term and the long term.Chris’ expertise includes difficult issues such as analysis of unallocated family support and the valuation of defined benefit pensions for individuals. Unallocated family support helps clients with child support obligations to optimize taxes to generate additional cash flow for the family. Pensions are a difficult to value asset; dividing them incorrectly could result in less benefits than hoped for.However, his strength is helping divorcing clients understand the long term financial consequences of divorce. He helps craft new financial plans for divorced individuals to ensure that they will meet their life and financial goals. Chris earned his Bachelor’s degree in Economics from the University of Rochester and his MBA in Finance from the University of Texas at Austin. He completed the Financial Planning program at Boston University. He is also a CFP® practitioner, and a Certified Divorce Financial Analyst™. He trained as a financial neutral at the Massachusetts Collaborative Law Council. He is also a trained Mediator in accordance with M.G.L. ch.233 § 23C.Chris has been widely quoted in the Boston Globe, New York Times, Forbes, CNBC, Wall Street Journal, Marketwatch, Investment News and Bloomberg. He has also been published in the Boston Globe, Kiplinger and Investopedia.Chris is the Treasurer of the Association of Divorce Financial Planners. He was the founding Director of the Greater Boston Chapter of the Association of Divorce Financial Planners. He is a member of the Financial Planning Association, the Divorce Center and the Massachusetts Council on Family Mediation.

Leave A Comment