Family law attorney Corri Fetman received a lot of publicity—much of it bad— when her all-female law firm ran the above cheeky advertisement to spur business. No, it’s not exactly unethical to encourage people to break up their families because there is better sex to be had, it’s just sleazy. (Funny! But sleazy….) Now, however, marital-dissolution lawyers are engaged in due diligence and meeting the ethical the of communication by telling their clients–particularly the wealthy ones— that if they want out, the clock is running.
One of the features in the new Republican tax law that the news media didn’t tell you about while it was trying to get you angry about it will eliminate the tax break for alimony payments. I didn’t even know that alimony was deductible, but you can bet Donald Trump did. Now, they won’t be if they are finalized after December 31, 2018.
Under the new law, Americans who finalize or modify divorce agreements in 2019 or later will no longer be able to deduct alimony payments from their taxes. The IRS says that about 600,000 taxpayers claim the deduction each year, and the cost to the Treasury is not chump change. The current, soon-to-be-ended system allows those paying alimony or so-called unallocated support, which are payments meant to help a divorcing spouse and children at the same time, to deduct all of it from their income before calculating what they owe in taxes.
I’d like to know why alimony was ever deductible. Deductions are supposed to encourage conduct and expenditures that benefit society, like buying a home (domestic stability, the economy) and giving to charity. Why would the government want to encourage divorces, and reward the guy who is paying alimony because he cheated on his wife and got nailed in the settlement? Why should I be paying part of Donald Trump’s/ Tom Cruise’s/ George Clooney’s/ Harrison Ford’s alimony payments?
Analysts suggest that the absence of the deduction may lower divorce rates slightly. Good.
I have to find out what else is in that tax law, which was generally irresponsible, since it adds to the national debt. Apparently there are some silver linings…
25 thoughts on “Wait, WHAT? Alimony Is Deductible? Why?”
I paid alimony and deducted the amount from my taxable income; but, one thing is being left out – the spouse is required to pay tax on the alimony he or she receives. At least that was the law when i was divorced.
So, I forgot to add, that the income was still being taxed by the receiving party – granted maybe at a lower tax bracket.
If the new law recognizes the balance and also amends the tax code that alimony-receiving people do not pay taxes on the alimony, then this seems to maintain the balance…
Any idea if that “if” is true?
Doesn’t that make even less sense?
I currently work in Family Law in New Jersey. Edward is correct, the alimony payments had to be taxed somewhere (either as earned income, or as income from the receiving party). Oftentimes, however, this would allow the US treasury to fund a not insignificant portion of the divorce, based on the respective tax brackets of the payor vs. the payee. The new law is an improvement at least in this regard, in my opinion.
So yes alimony — in those states that have it — is generally tax deductible. Where it is deductible then it must be claimed as income by the spouse receiving. When the deduction ends, so will the income end of the equation.
This generally applies only to new divorce agreements after December 31, 2018. If you’re already paying alimony it will continue to be deductible — and will continue to be taxable to the spouse.
As I understand it, community property states generally tend not to have alimony agreements since the property is owned jointly and split up on divorce. I could be mistaken about that, since I’m not currently in a community property state.
Canada changes this every four years, I swear to God… It’s such a pain in the… Ahem.
One of the tenets of taxation is that the law should aspire to arrange that items should only taxed once. In the case of alimony, generally, depending on what season it is, Canada will either tax the income earner and not count alimony payments as taxable income, or will allow the deduction for alimony but tax the payments to the recipient as taxable income.
The better way to do this for everyone involved is to tax the income earner, that person’s taxes will almost always be higher than that of the recipient, so the government gets more sweet, sweet tax dollars, and it has the added benefit of not taxing (generally) single mothers, because the optics are crap.
I haven’t read the law yet either, but I’d bet money this is a tax shift, as opposed to a repealed deduction, because there’s no way a government set up that the deduction without counting the payment as income, and what tax law should really avoid is both taxing the original income, and then taxing the alimony payments.
The adorable part of this is that you think the government will actively avoid taxing money multiple times before it reaches an end point.
I once read that the price of a loaf a bread was almost doubled when all the upstream taxes were counted.
Don’t know if that is true, but let’s take a look:
The farmer was taxed on fuel, electricity, water, property, and equipment. Think of that as overhead.
The wages of the harvesters were taxed.
The trucks taking it to the mill were taxed.
The mill was taxed.
The truck taking the bread to the distributor was taxed.
The grocer was taxed.
The bread was not taxed at the point of sale (in Texas) but think of the burden of all of the above that figures into the price itself.
I agree that alimony should not be deductible however the recipient was obligated to report that as income. Nonetheless, deducting alimony paid when one is in the 38% bracket and taxed at a lower rate if the recipient has no other income. With that said, deductability is not an incentive to divorce. The old notion that a bit more in deductions can get you to a lower tax bracket is long gone because the brackets are fewer and broader. It does however make the fight over higher payments less lI believeikely because of the deductability. This allowed the wife (historically most likely) to get larger alimony payments. Personally, I believe alimony should be phased out. The entire purpose was to protect women who had few skills from being forced into poverty. Society has changed to such a degree that women have many more choices. I believe I read that most divorce currently is instigated by women because they are unhappy with their current partner and they have found a new love. Infidelity has shifted from predominately being a male behavior to women behaving similarly.
With respect to the tax cuts gross reciepts are higher during the first five months of 2018 than in the same period of the prior year according to the tax policy institute. Debt is a function of spending not revenue.
Technically correct, but as the US borrows money to make up for revenue shortfalls, and then never pays it back, just ever-increasing interest, that’s just quibbling, no?
Tax reciepts are a function of the rate times the base. If the rates fall but the income base grows by a higher percentage then general tax reciepts rise. This happened with the Kennedy and Reagan cuts and the Kennedy cut was a huge reduction in rates and gross reciepts rose. These cuts despite the propagand never lowered the top rate of 38% .
We borrow to cover the costs of entitlements which continue to grow. Some income based transfers (food stamps) are going down because incomes are rising. To drastically reduce entitlement spending we would have to cut Soc. Sec., Medicare and Medicaid spending which not even Trump will touch. Income taxes should not be covering these entitlements anyway. If I were crafting tax policy I would exempt from payroll taxes whatever the poverty threshold level is for that year and increase the income cap at the high end. Raising payroll taxes on high income earners prevents tax avoidance, minimizes negative employment impact as high earners are less substitutable, and there is no theoretical upper limit. Tax anaylsts could establish the upper limits based on lost taxes on the first 12K across the board. Such a plan would also negate the need for the AMT.
But why do we have a shortfall? Short answer demand for transfer payments. Transfers are vote getters because it is money given for no value in exchange. Social Security is excepted because we pay in but we draw our far more than we pay in especially in Medicare and prescription drugs
But not all entitlement programs have the same drain on the treasury. Up until recently, Social Security was taking in more money than it paid out so that it was a net gain to the treasury (which is a whole different travesty of government accounting, but that’s another story). Now it runs a net loss which I don’t think is huge currently, but which will eventually (until changes are made) grow to about a third of the total payouts. Medicare is mostly paid for via payroll taxes, I believe, and there are several potential fixes to get it back to where it is self supporting.
Medicaid, on the other hand, is a pure entitlement program as far as I know. I believe it comes out of general revenues and it is steadily growing each year.
Doubtless there are innumerable other entitlement programs, but I believe these three are the elephants in the room.
Non-discretionary expenditures dwarf discretionary ones. Transfers are but one type of non discretionary expenditures In my first post I made an exception for SS because of payroll taxes What scares me is interest on our current debt. If we have to refi it at higher rates because we do nothing to control spending then important discretionary spending will be the first to go. With that said, my only point is that the 1.5 t tax cut has not proven itself to be a net reciepts loser. The level of economic growth over the next 8 years will determine that. If current gdp growth continues at its current pace or a mere 3% it should prove to be a net positive.
Money is fungible and today Payroll taxes and their earmarks are comingled with general fund accounts. We need to go back to isolating SS/medicare taxes and outlays. The supposed SS trust fund is stocked with plenty of IOUs from the treasury. I expect the fed to at some point monetize that debt and inflation will be rampant.
I checked the numbers for Medicare financing for 2017.
Part A 37% from payroll taxes 41% general fund, remainder other sources
Part B 0% payroll taxes, about 23 % beneficiary premiums, the remainder general fund, stare transfers for medicare medicaid dual eligibility and other.
Part C separately financed
Part D prescriptions 87% general fund remainder premiums and other sources
Medicare is not fully funded or mostly funded through payroll taxes in anyway shape or form. Growth in spending is estimated to go from 400+billion to 700billion this year. Kaiser Foundation
I think you’ve transposed some columns here: I looked at the Kaiser Foundation page — it shows Part A is funded 87% from payroll taxes, less than 1% from general revenue.
What you show as Part A was the overall total: 37% payroll taxes, 14% premiums, 41% general revenue.
Overall I stand corrected on my thoughts as to total Medicare funding. I guess I was thinking of the Part A (hospital) benefits, which are nearly all funded by taxes.
Yes, the interest on the national debt has the potential to be a killer — if the effective interest rate goes up 1% that would be an additional $200 billion per year in interest. The numbers can be mind boggling.
On the other hand, if we do achieve a relatively modest growth rate over the next decade, overall tax revenues should go up versus pre-tax reform numbers. Perhaps that won’t happen, but it at least offers us a chance — a better chance than we had before, IMO.
Diego, I should clarify that when I evaluated OASI and Medicare I lumped HI (Payroll tax funded part A) with SMI (general revenues and premiums Part B) together. In short I treated All facets of Medicare as one program and developed the financing percentages from the total cost. It should be noted that interest earnings of OASI and HI are really general fund transfers that are cloaked as independent revenues.
I don’t think our thoughts are that far apart. There are certainly ways to fix Social Security and Medicare — but so far they have always been demagogue’d to death. I have little faith in Congress actually passing a real fix until they go belly up.
“I didn’t even know that alimony was deductible, but you can bet Donald Trump did.”
If you had watched TV instead of wasting your time in school, you’d have maybe learned something useful:
Alimony isn’t necessarily paid from the cheating spouse to the betrayed spouse. In the state of California it is for 5 years for marriages less than 10 years and for LIFE if married longer. Why the divorce happened doesn’t matter.
I know men who write a check to their cheating ex wife every month and will until they die.
Exactly what I was going to comment. There also seems to be an assumption that the men are Donald Trumps and George Clooneys, when the numbers are staggering just how many fathers/exhusbands are driven to bankruptcy and homelessness due to these payments. Let’s take a guy who is earning 2000 dollars a month, making him give 1400 of it to his exwife who gets government benefits on top of it, and then make sure HE pays the tax on the dollars earned at the same time. Boy, after all that, he better hope he’s got a good visitation plan with his kids – if he has time left after his third job.
More incentive to not get married. It is a completely crazy people´s game.
Don’t be bitter.
The elephant in the room is how MEN are treated by this system. As mentioned before, many women are doing the horse trading, but the playing field is slanted (at least in Texas) to favor one gender over the other.
This was a conservative approach back when women really did have more limited options: it is backfiring now. The woman might be the offender, and/or might be the higher income earner. I know of situations where the woman cheated, traded her husband in for a younger year model, and HE has to pay despite being blue collar to her executive salary. (no kids)
However, in recent years the one who keeps the kids is gradually getting the payments, even if they are male… and that was not the case very often 10 years ago.
Yes, deadbeat dads are an epidemic… but deadbeat moms exist too. I had one, during the late 70s through the 80s, and my public school teacher dad had to fight off attempts to pay her for simply existing. He raised us, and she did not contribute a net dime the vast majority of the time.