House Bill Highlights Alimony as a “Taxing ” Subject
- 08 December 2017
- Cindy Vova
- 0 Comments
So what are the first signs that a (non CPA or tax attorney) has no real excitement in one’s
life? My personal litmus test is when I started reading the information on the two, somewhat competing, tax bills passed by the House and Senate over the past month.
To be fair, I am sure whatever form or hybrid form of tax reform passes, I won’t benefit. But, if the House bill passes, any benefits that I will lose (as if the current tax laws provide me benefits…) will be nothing compared to my pending and future clients who have alimony obligations looming.
In a nutshell, heretofore (my lawyer sounding word of the day), typically when a person paid alimony to a former spouse, the alimony payment was deducted from the payer’s income. For example, if a person grossed $150,000 a year, and (oh, heck, we will make the person a “he” because, let’s face it, even in the Mary Barra and Ginna Rometty era of women CEOs most alimony payers are still male) and he paid alimony of $25,000 a year, his gross income would be reduced to $125,000 and he would be taxed on this lower amount.
On the other hand, the alimony recipient who, for example, earned $50,000 a year from employment, would add the $25,000 of alimony to her income and be taxed on a total income of $75,000.
However, not any more if the House Bill passes. Under that bill, the payer would receive no tax deduction for alimony payments, and the payee would pay no tax on the alimony received.
“What difference does that make?” you may ask. It’s pretty simple. If the alimony is tax deductible, the amount paid for alimony really doesn’t effectively “cost” the payer the full amount. So if a party is in the 30% tax bracket and pays $2000 a month, it is effectively costing him $1400 a month (2000 x .30 = 600 & 2000-600=1400).
That $2000 is then taxed to the recipient who, most likely, is in a lower tax bracket. For example, if she is taxed at 20% then that $2000 is really only worth $1600. So, in effect, on my example, Uncle Sam (you know the guy dressed in patriotic garb and who, if instead wore a white suit would bear a striking resemblance to Colonel Sanders) would lose $200 of tax dollars. I believe, this is what is commonly referred to in, for example, sports, as the “spread.”
Now, the question is, did some drafter of this bill actually figure out that the government is losing billions of dollars on this spread? I would love to know, but I would guess the answer is no.
So where does that leave the poor family lawyer (who, I should mention will not, as a small business, benefit from the reduced “corporate tax rate”) in trying to settle a case involving alimony? The net effect is it has been easier explain to a spouse who will have to pay alimony that it is not, bottom line, costing him as much as the actual check he writes each month, incentivizing him to resolve the case. Of course, when I represent the alimony recipient, I always have to factor in to the alimony number what the client will actually net, to ensure that the recipient is not cut short either. I would guess that it leaves us in a position where we now have to figure out what the tax benefit would have been to a payer if the alimony was deductible and what the tax burden would have been if the alimony was taxable to the recipient….and then come to a middle ground? Really, if I wanted to do this much math I would have become an accountant.
On the other hand, the Senate Bill keeps alimony as deductible to the payer and taxable to the recipient. This is just one of the many conflicts between the two bills. So, stay tuned and let’s see what our elected officials in Washington do to resolve these conflicts. With the holidays upon us, I would guess they are more consumed with drinking egg nog than using their noggins to resolve these conflicts.
Either way, I think I’ll enjoy the holidays too, and then after January 1st, if a tax reform bill passes, pick up with my reading again.