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Alimony deduction under review

The tax overhaul bill being reviewed in the nation's capital may eliminate a popular tax deduction. Section 1039 of the House bill, if approved, would take away the alimony deduction. While it may not generate substantial revenue, the proposed bill may have a large impact on taxpayers who pay spousal support and even its recipients.

Current federal tax law allows payors to deduct alimony payments from their taxable income. Recipients of these payments must treat it as taxable income. However, families can save on their taxes because payors are usually in a higher tax bracket and shift taxes to recipients who are usually in a lower bracket.

This helps improve cash flow for divorcing couples. Allocation of these savings may be determined by the court or negotiated by the parties.

If this bill becomes law, there may be a significant impact on divorce settlements. Alimony is considered one of the most significant deductions and an inducement for agreeing to spousal support payments. Absent this deduction, alimony will become more expensive. Payors will be more reluctant to make these payments.

Even though support recipients will no longer pay taxes on alimony, their incomes will be reduced. Divorce negotiations and courts will consider the payor's higher tax bill as a factor.

It is anticipated that changes to the deduction will lead to major activity in New Mexico and other states to change alimony laws and guidelines. Spousal support payments may be revised downward to offset the loss of the tax deduction.

However, this proposed change is anticipated to raise relatively little revenue. Elimination of this deduction is forecast to raise approximately $8 billion over 10 years. The tax increase on payors will be balanced by the lower taxes on recipients because alimony will not be taxed as income.

Couples undergoing divorce should seek legal assistance to consider the impact of a divorce decree on their taxes and other finances. An experienced family law attorney can help assure that negotiations or litigation lead to a fair and reasonable decree.

Source: Kiplinger's Personal Finance, "Divorce alert: Tax bill targets alimony deduction," By Chris Chen, Nov. 7, 2017

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