Global Family Law Services

Proposed tax changes may impact alimony awards

| Nov 21, 2017 | Spousal Support, Tax Planning

If you haven’t heard about the competing tax plans proposed by Congress, you haven’t been reading the news.

Just as soon as the House of Representatives released their proposed tax plan, the phones started ringing at the offices of domestic relations lawyers throughout the country.

Currently, alimony – which is more appropriately called “spousal support” in Ohio – is considered taxable income to the recipient, and tax-deductible to the payer. In that way, income tax on the money will generally be paid by the person in the lower income tax bracket. (In contrast, income tax on money that goes toward child support is the responsibility of the payer.) Divorce lawyers have long taken advantage of this tax schema to help resolve their cases, since it gives the higher income earner some incentive to agree to a higher amount of spousal support than he or she might otherwise.

It is true that spousal support awards – which originally were intended to provide for women who were predominately homemakers or who had lower-earning positions than their spouses – have been decreasing over time as societal norms change. Even so, IRS statistics indicate some 12 million tax returns claim deductions for spousal support payments each year, and it remains an important component of many divorce negotiations.

In theory, removing the deduction could generate higher revenues because the money would be taxed at the payer’s higher tax rate. In addition, this proposal looks to address the disparity in reporting; the number of recipients claiming spousal support income totals something closer to 10 million, creating an administrative nightmare for the IRS to reconcile underreporting and recover the missing revenue.

However, experts generally believe that spousal support awards, whether through settlement or ordered by a court, are likely to get a lot less generous if this law is enacted. The Ohio spousal support statute specifically requires a court consider the tax implications when determining an appropriate award. Under the proposed schema, a higher amount of any award will get allocated to taxes, and the money simply won’t go as far. How could awards not be impacted?

Doubtless, in settlement negotiations prospective payers will be making the same assessments. Certainly, a higher monthly support amount is more doable and palatable when the payer knows that some relief will come at tax time.

The current proposal seems to suggest that the change would take place for spousal support awards that start after 2017. It remains to be seen if this provision will see the light of day as actual law. In the meantime, practitioners are collectively holding their breath, anticipating an onslaught of requests to modify existing awards if this proposal sticks.

This article originally appeared as a column for the Cleveland Jewish News.