Changes Directly Affecting Family Law

Post 6 of 25

Tax Spousal Support/Alimony

Changes Directly Affecting Family Law

I was sent this article from Jeremy Salvador, which I thought it would be nice to share on our site.

The bill, called the “Tax Cuts and Jobs Act,” will certainly be subject to many changes prior to the House acting on it over the next several weeks.  But one of its key provisions of is the elimination of most itemized deductions – which would include the elimination of the deduction for alimony paid as well as the deduction for legal and accounting fees incurred to receive alimony. This is a penalty, if you will, on the family law.

Presumably, under this bill, alimony would be treated similarly to child support from a taxation perspective – that is, nontaxable to the recipient and nondeductible to the payor. But at this point we are not sure. Alternatively, if the bill results in alimony being taxable income to the recipient without a deduction to the payor, this could spell disaster.

Looking to the Future

Naturally, the passage of this bill could fundamentally transform discussions regarding support. So how can we, as a community, prepare ourselves for what’s to come?

1)      Contact your House Representative and express your concerns: https://www.house.gov/representatives/find/

2)      Consider whether the passage of the tax bill constitutes a change of circumstances.

3)      Determine whether there is a material difference in net spendable income under the new proposed tax laws.

To assist, I’ve included a table to give you a perspective of the difference between monthly taxable spousal support and non-taxable spousal support at various levels. Each row represents the same amount of net spendable income to the recipient.

Taxable

Spousal Support

Nontaxable

Spousal Support

Percentage Difference
$1,000$1,0000%
$5,000$4,561-8.78%
$10,000$7,862-21.38%
$20,000$13,874-30.63%
$30,000$19,547-34.84%
$40,000$25,705-35.74%
$50,000$31,241-37.52%
$100,000$57,115-42.89%
$250,000$133,883-46.45%
$500,000$261,830-47.63%
(Computed using 2017 tax rates – which may be subject to change under the bill)

 

Other Provisions

Here’s a summary of the other main components of the tax proposal:

  • Corporate tax rate of 20% after 2017; personal service corporations would get a 25% tax rate after 2017
  • Repatriation – 12% for liquid assets and 5% for ill-liquid assets paid over eight years with equal annual installments (12.5 percent of total tax liability)
  • Territorial tax system for overseas corporate earnings
  • Limitation of corporate interest deductibility; disallowance of a deduction for net interest in excess of 30 percent of the business’s adjustable taxable income
  • 100% immediate expensing from September 27, 2017 to January 1, 2023
  • Preserves Research and Development tax credit
  • Rate on pass-through entities (S-Corps, LLCs and sole proprietorships) reduced to 25%; not all income will qualify for the reduced rate
  • New tax brackets for individuals (12%, 25%, 35%, and 39.6%)
  • Repeal of corporate and individual AMT
  • Almost doubles the standard deduction ($24,000 for couples and $12,000 for individuals)
  • Estate Tax phased out and eliminated in 2024
  • State and local tax deduction (SALT) – taxpayers may continue to deduct property taxes up to $10,000 (not other state and local taxes)
  • Mortgage interest deduction unchanged for existing homeowners; newly purchased homes get a deduction for up to $500,000 and no deduction for second homes
  • No changes to pre-tax contributions to 401(k) plans
  • Like Kind Exchanges modified to allow for like kind exchanges for real property only; effective for transfers after 2017
  • Obamacare taxes largely remain in place; deduction for high medical costs is eliminated
  • Muni bond tax exemption appears safe; however, still examining text to see if there is a backdoor assault on municipal bonds

This article was written by aaadivbk