2017 Tax Reform Would End Alimony Deductions Prospectively

2017 Tax Reform Would End Alimony Deductions Prospectively

On November 2, 2017, the Chairman of the U.S. House Ways and Means Committee Rep. Kevin Brady (R-Texas) released the Chairman’s Markup of the proposed Tax Cuts and Jobs Act of 2017, which is the initial House proposal to overhaul the federal tax code.  Among other things, the House tax proposal would eliminate the tax deduction for alimony payments.

FROM THE NOVEMBER 2, 2017 CHAIRMAN’S MARKUP OF THE PROPOSED TAX CUTS AND JOBS ACT

SEC. 1309. REPEAL OF DEDUCTION FOR ALIMONY PAYMENTS.

(a) IN GENERAL.—Part VII of subchapter B is amended by striking by striking section 215 (and by striking the item relating to such section in the table of section for such subpart).

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to—

(1) any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 2017, and

(2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.

The proposed House tax bill would preserve the deduction for alimony paid pursuant to an existing divorce order or agreement, unless the order or agreement authorizes an adjustment when the law changes.

Weighing in on the issue, the Joint Committee on Taxation (JCT) characterized the alimony tax deduction as a “divorce subsidy” that gives a tax advantage to divorced couples over married couples. The JCT is a Congressional committee co-chaired by Rep. Brady and the Chair of the U.S. Senate Committee on Finance Sen. Orin G. Hatch (R-Utah). The JCT estimated that elimination of the alimony deduction will increase tax revenues by $8.3 billion over 10 years from 2018 to 2027.

Already I’ve been receiving questions from family lawyers:

  1.  If the alimony tax deduction is eliminated, would alimony recipients be excused from reporting alimony as income?  Yes, there is a corresponding revision to Sec. 71.  The proposed law might also affect alimony trusts, which I will continue to investigate.
  2. Would this affect temporary spousal support and alimony pendente lite?  Depends. If an order or agreement was entered before 12/31/17, it will be treated as alimony under the old law (even if payments are made later).  But, if there is a modification after 12/31/17, the new law would apply to alimony, spousal support and APL payments made after the modification.
  3. Do we need to add protective language to our settlement agreements?  Maybe.  My book, Frumkes & Vertz on Divorce Taxation, contains sample language.  Fortunately, this tax bill does not affect divorce instruments that were completed before 12/31/17, but it remains to be seen how the bill might evolve.  Cautious lawyers might want to start adding language to their agreements.

The alimony deduction is just one of many tax deductions that may affect divorced and separated spouses. In my family law practice, I help spouses resolve complex financial issues and tax problems.  To schedule a callback with me, send me an email, call my law firm at 412-471-9000, or use the contact form.