Talking Tax Reform - Part VI

Everyone who knows that I do for a living comments that the Trump Tax Plan must have me really busy at this moment.  They are correct.  Any tax professional who isn't busier in 2018 than in the past is an anomaly.  But are we the people who will be the busiest this year due to these changes in the law?  Probably but there is one other group of professionals for whom 2018 is going to be very challenging due to the Trump Tax Plan.  Family attorneys.

Wait a minute.  Why in the world would family attorneys be busier as a result of changes to the tax laws?  Because one of the changes in the Trump Tax Plan is the repeal of the deduction for payment of alimony. 

Under the tax law prior to the new bill being signed into law, alimony was taxable income to the recipient and deducted from income for the person paying it.  For the sake of clarity, it is worth noting that this only applies to alimony/separate maintenance and so on; but not to payment of child support.

Why would Congress target this particular nuance in the tax code?  Because the way alimony was being taxed and deducted resulted in a net loss of tax revenue.  Typically, the person paying alimony has a higher income (and a higher tax rate as a result) than the person receiving it.  Let's look at an example.

Alimony Payer is paying $4,000 per month to their former spouse as part of their divorce decree.  That person deducts $48,000 from their income.  Since their highest marginal tax rate is 28%, they save $13,440 in income tax.

Alimony Recipient receives that amount of income but their highest marginal rate is 15%, thanks to the standard deduction and personal exemptions.  Their additional tax on the alimony income is $7,200.

The result is that the federal government loses $6,240 in tax revenue on the deal.

The thing is, that divorce decrees providing for payment of alimony entered into prior to a specific calendar date are grandfathered in under the old rules.  That date is December 31, 2018.

What this means is that a couple who is in the process of divorcing where alimony will be part of the process have very different agendas.  The person who will be paying alimony is going to be desperate to get that divorce finalized BEFORE December 31, 2018.  This will allow them to deduct their alimony payments from their income.

On the other hand, the person who will be receiving the alimony will want to delay the divorce so that it is final AFTER December 31, 2018.  This will allow them to avoid being taxed on their alimony income.

Ironically, this is one of the very rare instances in the Trump Tax Plan where the resulting change will not benefit the wealthier person in the situation.

A reminder that when all is said and done, the Trump Tax Plan is a boon to the rich being financed by $1.5 trillion being added to the national debt.