A recently proposed tax reform bill could eliminate the current tax deductions for individuals who pay alimony. If this legislation passes, it will eliminate the deduction effective January 1, 2018, meaning the deduction will not apply to separation agreements and alimony orders entered after 2017. Additionally, this legislation could eliminate the deduction when modifying alimony orders.
According to AAML fellow and tax expert, Melvin Frumkes, the current tax law allows those paying alimony to deduct the payments from their taxable income. The person receiving alimony is responsible for reporting these payments as income if it meets the following requirements—also known as the 7 D’s:
1. Dollars – payments must be in dollars and not services.
2. Distance – parties do not live together.
3. Documents – a written divorce decree, separation agreement or Court order (can include temporary orders); excludes voluntary payments.
4. Death – must terminate on the death of the payee.
5. Designation – cannot be for something else.
6. Dumping – the alimony payments can’t be front loaded, otherwise the payor may be subject to taxes on the payments pursuant to the recapture rule.
7. Dependents – cannot be for child support (also cannot be contingent on a child support event).
The 7 D’s would be eliminated under the current contemplated tax reform legislation, which means these payments would no longer be tax deductible beginning January 1, 2018.
Those of you who are currently in the midst of settling a case, but have decided to put things on hold for the holidays, should consider pushing forward and attempting to settle the case before the end of the year. Those of you who were previously uninterested in settling should consider doing so to take advantage of the tax deduction while you still have time.
If you are the supporting spouse (the one responsible for paying alimony), it would benefit you from a settlement standpoint to remind the other side that, if your case is not settled before January 1, 2018, you may be forced to reduce your alimony offer due to the loss of the alimony deduction. If you are on the other side and are receiving alimony payments, you could encourage settlement with the supporting spouse using the same facts and reasoning.
This proposed tax reform bill has passed the Senate and a similar bill has passed the House. While the House version of the bill clearly eliminates the alimony deduction for orders entered after 2017, the Senate bill does not contain the provision eliminating the deduction. The bill went to committee this week to reconcile the two versions. According to The New York Times, majority leader, Sen. Mitch McConnell, expressed little doubt that a consensus plan would soon become law after a conference committee resolved the differences between the two bills. President Trump also publicized his support on twitter saying that he “looks forward to signing a final bill before Christmas.”
Stephen A. Guardipee is a family law attorney with Hatcher Law Group. In addition to divorce and property distribution, he assists clients with child support, child custody and other domestic related issues.