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New Republican Tax Legislation and the Alimony Deduction

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On November 2, 2017, the House Ways and Means Committee introduced H.R.1, also known as the “Tax Cuts and Jobs Act.” Several provisions within are set to impact divorce, and property settlement. And, though its passage into law is still far away, and the bill is likely to undergo several revisions and changes between now and then, understanding the changes and how they might impact your divorce is important.

Specifically, there are two provisions of concern:

  1. Section 1309, which eliminates the alimony deduction; and
  2. Section 1302, which significantly reduces the mortgage interest deductions

The Current Law and Effect of the Proposed Changes

The current law provides that alimony payments are deductible for the payor (i.e. the spouse paying support) and the payee (i.e. the spouse receiving support) has to pay taxes on the support. This is ideal because the payee is often taxed in lower income brackets than the payor, meaning that the payor is enjoying more significant benefits, and the payee is getting more in support as a result. The only “loser,” if there were one, is the government, because it’s earning less revenue in taxes under this scheme.

The new proposal, which would take effect after December 31, 2017, changes this scheme by no longer allowing the payor to deduct their alimony payments and not allowing payees to include the payments in their income. Essentially, this would shift taxation from the payee to the payor, which could pose serious implications for divorce settlements.

Are There any Pros to the New Law?

Yes, but not for couples going through a separation or divorce!

Most benefits are for the government, though there is an equity argument here too. Under the old law, separated or divorced spouses were receiving what was commonly known, though not formally, a “divorce subsidy.” This meant that they were receiving tax benefits for providing the same support to each other that most married couples do, although married couples are not able to get the same benefits as divorced couples. Child support is non-deductible, and is essentially the model for the new alimony provisions under the proposed bill.

The other massive benefit to the government is in revenues, $8.2 billion to be exact. In fact, the tax amendment would mean the government will earn that much between 2018 and 2027 alone.

Are There Any Cons to the New Law? 

There are two major cons to the proposed amendment:

  1. Less Alimony Will be Rewarded – Because payors can no longer deduct alimony payments, it’s incredibly unlikely that a court will order the same amount in alimony. Instead, the government will get more of the payment, the payor will receive virtually no tax benefits, and the payee will have less available cash. While this is a win for the government, the same can’t be said for those going through a separation or divorce.
  2. Complicated Property Division – The marital residence is a major asset in most divorces. The new proposition will lower mortgage interest deductions on up to $1 million to deductions on up to $500,000. Because of this, spouses who retain the marital residence in property settlement may have a more difficult time paying for it, which, combined with the alimony deduction dilemma, can pose even more complicated problems for divorce.

Truth be told, this bill has a long way to go. And, although the House is set on passing the legislation before Thanksgiving, it will still have to travel through the Senate, where it’s likely to undergo further changes.

Need an Expert to Talk to?

If you’re concerned about how this proposed legislation might affect your divorce, contact Lawrence R. Surinak Ltd. at 630-470-9990. Though we too are staying abreast of new developments, we’ll be able to offer guidance and peace of mind knowing what to expect in your case every step of the way!

Concentrated on Family Law

Lawrence R. Surinak Ltd. is a law firm concentrating solely on family law and has served clients in DuPage, Will, Kane, and Kendall counties for over 35 years.

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About Attorney Lawrence R. Surinak Ltd.

Lawrence R. Surinak Ltd. is a law firm concentrating solely on family law and has served clients in DuPage, Will, Kane, and Kendall counties for over 35 years.

We continue to work with clients in Naperville, Wheaton, Lisle, Oswego, Downers Grove, and the surrounding areas to provide one-on-one support and attention that will help you through this difficult time.

If you have any questions or concerns, please feel free to contact us at any time. We look forward to offering our expertise and support to you throughout your case and after.