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The Unintended Consequences of the Elimination of the Above-The-Line Deduction for Alimony

AlimonyIt is December 21, 2017. I write this before the House Bill becomes law. The house bill relating to spousal support and alimony likely initially benefits, then almost certainly harms, economically-dependent spouses in long-term marriages.

Under current law, spousal support, also known as alimony, is deductible to the spouse making payments and is included in the income of the recipient.

In the new proposed law, however, beginning on January 1, 2019, alimony or spousal support will no longer be tax-deductible by the payor or included in the taxable income of the recipient. However, this new law will pertain only to new orders and agreements, specifically divorce orders entered after January 1, 2019 and Separation Agreements (also known in Virginia as Marital Settlement Agreements, Property Settlement Agreements, and Marital Agreements) entered into by the parties on and after January 1, 2019.

This is a monumental change for high-income earners who reach agreement or divorce after January 1, 2019.  Why?  If they used to be in the 45% marginal tax bracket (federal and state), a $10,000 alimony or support payment cost them, in real dollars, $5,500. After January 1, 2019, it will cost them $10,000.

Why is this deduction being eliminated? The main reason is that it allows a higher percentage of the spousal support amount to be taxed. Typically, the spousal support payor is in a higher tax bracket than the spousal support recipient. Say, for example, the spousal support payor is in an effective tax bracket of 45%, and the recipient is in a 25% effective tax bracket. If spousal support is $5,000 per month, the federal government would receive $2,250 of those funds in taxes if based on the payor’s tax rate, and $1,250 if based on the recipient’s tax rate.

What is curious about the delay in implementation is how it affects 2018. Some alimony recipients will delay reaching agreement or the obtaining of a divorce until after 2018, hoping to get a boon of non-taxable spousal support by delaying finality until 2019. In contrast, alimony payors will be aggressively seeking to reach finality in 2018 – whether by agreement or trial. There will be a lot of agreements that mysteriously fail to get signed.  Accordingly, the divorce process will be more acrimonious for many, and the tax delay will fuel that acrimony.

It’s an unintended cost of our government not wanting to shock the state courts and family lawyers with a new law.

At first blush, all of this seems good for alimony recipients. And it may, or may not be, for those alimony recipients who divorce or reach agreement immediately after December 31, 2018. However, the long-term effects of all of this are not good for traditional, economically-dependent spouses. Beginning in January of 2019, Virginia and other state courts will correct for the change in the tax law and begin awarding less spousal support than they historically did to make up for the shift in this tax burden. In addition, there is a growing popular view that the bulk of income need not be earned predominantly by one gender and that the bulk of parenting need not be done predominantly by another gender. These two factors mean the family model whereby one spouse foregoes a personal career to care for home and family, and the other ensures financial security for the family and both spouses, is being slowly discouraged.

All of this will lead, not just to a decrease in the length and duration of alimony for those who see themselves as potential economic equals, but also to the decrease in length and duration of alimony for those who manifestly are not.  Why? That is just how ideas in society affect results in a courtroom.  Once it becomes popular to see alimony as bad, it won’t be seen as bad merely for the young or the majority, but for the older and the dependent.

It’s important for judges and family lawyers to recognize that alimony is not right or wrong; rather, it is an effort to provide needed financial support to a dependent spouse for an appropriate period of time. Not all payors are alike. Not all recipients are alike.

Some spousal support recipients may receive a boon in early 2019 due to receipt of a higher award of spousal support before the courts and laws adjust downwards due to this shift in the tax law. However, spousal support recipients will be the most harmed long-term by this change in the tax law, which will almost certainly reduce spousal support awards beginning in 2019, and provide a means by which the courts can justify moving away from giving larger support awards for indefinite periods of time.

David E.Roop, JR

Roop Law is an Attorney at Roop Law. You can follow him on Facebook and connect via LinkedIn

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