Subsidized Divorce and Other Concepts from Washington
Rep. Dave Camp, who Chairs the House Ways and Means Committee, introduced his “tax reform” plan. The proposal calls for lowering income tax rates for most individuals and businesses, but at the same time reducing the value of or eliminating entirely tax deductions. You can read Chairman Camp’s Section by Section Summary of the Tax Reform Act of 2014.
Alimony and Taxes
As with all proposed legislation, the devil is always in the details. The tax Reform Act of 2014 would substantially changed the tax consequences and treatment of alimony. Currently, the person paying alimony is entitled to deduct the alimony payment from their gross income. The recipient of the alimony has to include the alimony payment in their gross income. This makes paying alimony more palatable especially for high income alimony payers.
There can be real tax savings when the recipient of the alimony is in a lower marginal tax bracket. The tax treatment of alimony is always part of the negotiation for alimony as part of a property settlement agreement. The courts are required to consider the tax implications of alimony when setting or modifying an alimony obligation. This legislation, if enacted, would fundamentally change alimony as we know it.
Alimony Post 2014
The proposed legislation would not apply to alimony obligation executed after 2014. However, any modification to an existing alimony award would trigger the new tax treatment of the alimony payments. Chairman Camp sees the current tax payer deduction of alimony as a $5.5 billion “divorce subsidy.” In fact, The Section by Section Summary of the Tax Reform Act of 2014 which is published by the House Ways and Means Committee specifically refers to the “divorce subsidy.” You can read section 1411 of the report in its entirety below.
Sec. 1411. Repeal of deduction for alimony payments and corresponding inclusion in gross income.
Under current law, alimony payments generally are an-above-the line deduction for the payor and included in the income of the payee. However, alimony payments are not deductible by the payor or includible in the income of the payee if designated as such by the divorce decree or separation agreement.
Under the provision, alimony payments would not be deductible by the payor or includible in the income of the payee. The provision would be effective for any divorce decree or separation agreement executed after 2014 and to any modification after 2014 of any such instrument executed before such date if expressly provided for by such modification.
The provision would eliminate what is effectively a “divorce subsidy” under current law, in that a divorced couple can often achieve a better tax result for payments between them than a married couple can. The provision recognizes that the provision of spousal support as a consequence of a divorce or separation should have the same tax treatment as the provision of spousal support within the context of a married couple, as well as the provision of child support.
JCT estimate: According to JCT, the provision would increase revenues by $5.5 billion over 2014-2023.
According to a report yesterday in the Washington Post, Chairman Camp has decided not to seek reelection for his Congressional seat. I do not know whether this legislation has enough support to pass. It’s reasonable to assume that the announcement that Chairman Camp not seek reelection will only hurt the chances of this bill becoming law.
Do you have questions about alimony in New Jersey? Experienced help is a quick phone call or email away. If you have any questions regarding how your finical situation may affect your support obligations, or have any other general questions regarding divorce, child support or spousal support, please contact us online today or call (856) 546-1350 for a confidential consultation with one of our skilled family court lawyers.