Eliminating the alimony deduction, what? If the new tax plan actually does that, as is being suggested, what a whirlwind it will create.
Let’s start with the fact that it will remove one of the biggest incentives for the high earning spouse to offer to support the non-earning or low-earning spouse. Currently the high wage earner can pay alimony and deduct the payments, at their high tax bracket level, while the recipient pays taxes on it, at their low tax bracket level. The family saves money and dollars shift from the wealthier to the less wealthy. That is generally a good thing.
News reports say the change would be effective for agreements and orders entered after 2017. But those in the midst of negotiations should raise their antennas. This could be a true game changer.
When most high earners ask me about settlement, rarely are they interested in paying alimony … until I explain that it can be deductible. Eyes light up. All of a sudden the idea of “I will not pay her/him one red cent of alimony” becomes “can we make the whole settlement alimony?” People begin to think creatively about how to resolve their case. And that is a good thing.
So while America may save a few dollars this way (not a lot, because taxes are already being paid on these amounts, but now they will be paid at a higher rate), the real losers will be the dependent, non-monied spouses who could really use the support. In fact, those folks may now need more government help if they lose alimony. Wouldn’t we prefer that the support came from their former spouse? And with 50 percent of all marriages ending in divorce, that may be a heck of a lot of people losing much needed support. Let’s not forego this unique incentive for the higher wage earner to help.
Randall Kessler is a founder of Kessler & Solomiany and a past chair of the American Bar Association’s Family Law Section.