By Sam Brunson
Well, it has finally arrived. This morning, the House GOP gave us a 426-page bill (and an 82-page section-by-section summary).
There’s a lot going on here, and it’s hard to say how much attention we should pay. After all, now lobbyists, Democrats, and interest groups can read the bill and start arguing against (or for) it. Moreover, this is just the House; the Senate still has to release its bill,[fn1] which may differ substantially. And the fact that we have a bill doesn’t in any way indicate that (a) it will be enacted, or (b) the enacted law will look anything like the bill.
Still, we have a bill!
I’m sure other Surly bloggers will chime in on parts of the bill that stood out to them, but I wanted to highlight one provision that hasn’t had any publicity, as far as I know, but that will potentially have wide-spread effects: the treatment of alimony.
Under current law, a person who pays alimony gets a deduction for that alimony, and the recipient has to include alimony in gross income. Section 1309 of the new bill would repeal the deduction, and would also not require the recipient to include alimony in gross income.
That’s good, right? I mean, it looks like it saves the recipient money, because she doesn’t have to pay taxes on it now.
And in some cases, that’s probably true. But in the vast majority of cases, it’s not. See, as a general rule, the payor is going to have more income, and potentially be in a higher tax bracket. So by shifting taxable income to the payee, the couple reduces their combined tax burden; they can split the after-tax savings so that both have more after-tax money available to them.
Imagine, for instance, that payor is in the 39.6% bracket, and payee is in the 12% bracket. If payor owes $20,000 in alimony and can’t deduct it, she has to earn $33,112.58. After paying taxes of about $13,000, payee is left with $20,000. On the other hand, if payor can deduct alimony and payee wants $20,000 after taxes, payor only has to pay $22,727.27. Payee will owe $2,727.27 in taxes and have $20,000 left. If the two split the difference, payee can end up with more than $20,000 after taxes, while payor can spend less than $33,112.58.
And clearly, this is the result the House wants. The summary estimates that eliminating the deductibility of alimony payments will increase revenues by $8.3 billion over ten years.
So is this a good change? In some ways. It reduces the incentives for trying to recharacterize alimony as child support, because under this provision, neither would be deductible to the payor. And it eliminates the governmental subsidy to payee spouses.
At the same time, though, it seems unfair to both parties. Alimony doesn’t really represent consumption by the payor, and, while we have an income, not a consumption, tax, this is income that they payor spouse exercises very little control over. It doesn’t feel like income to the payor.
And perhaps worse, it will likely hurt payee spouses. Presumably, with the loss of deductibility, payor spouses will be less willing to negotiate, and payee spouses will end up with less alimony.[fn2] If we only see deduction as a subsidy to payors, it’s hard to be sympathetic. But if we see it as supporting poor taxpayers, this seems like a step in the wrong direction.
If the House bill is enacted, it will apply to divorce and separation agreements executed after December 31, 2017.
[fn1] I read that the Senate was shooting for next week, but as of this morning, any Googling about tax bills just turns up the House one.
[fn2] Alternatively, maybe payor spouses will end up paying more, but, given that they have more money, I assume they have more bargaining power and/or better advice, so I assume they’ll end up better.
6 thoughts on “The GOP Tax Plan and Divorce”
My understanding is that the method the bill takes used to be the law but it created a problem when tax rates rose because that left some payors without enough after-tax income to pay the alimony set in the divorce decree.
The bill’s provision would create transition problems (alimony amounts that were determined taking into account payor deductibility). It could also cause problems for payors lacking enough after-tax funds, if tax rates rise again significantly at some point in the future. This seems like game playing in an attempt to create a pay-for.
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It definitely feels like a pay-for, and not a thought-out policy.
Government already profits from divorce and divorce does not help society as a whole. If it’s not taxed up front and not deductible by the payor then it shouldn’t be included in income for either spouse. Government shouldn’t profit from dismantling families, the very fabric of society.
I’m not sure I follow what you’re saying. Earned income needs to be taxed to someone; the only question is whether paying it out in alimony breaks the link with earning it. That is, if the payor of alimony doesn’t have control over the money, maybe she shouldn’t pay taxes on it (in which case, the recipient should). Or maybe, because she earned it, she should pay taxes on it, in which case there’s a fair argument that the recipient shouldn’t.
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If both people were in one household the money would be taxed as one from whoever is getting the paycheck (it should work the same way, especially if the person who files earns the paycheck). Alimony isn’t a paycheck it is household funds dedicated to keeping the household functioning. Government already profits from divorce, alimony shouldn’t be taxed unless divorce is free in my opinion or at least reduced proportionally to what was paid to finalize the divorce.
I’m glad you’re drawing attention to this big consequence for family law. Alimony has been falling out of favor in divorces, and this tax reform would just accelerate that.