The Tax Reform Bill that is currently before Congress includes a provision to eliminate the ability to take a tax deduction for alimony, or maintenance, payments. If passed, this provision could become effective as early as January 1, 2018. This means that a divorce, legal separation, or modification orders entered into after December 31, 2017, would fall under the new guidelines of the Tax Reform Bill. Currently, the spouse who pays maintenance, or alimony, pursuant to a Court Order, can deduct those payments from his or her income. It is also important to remember that the proposed Tax Reform Bill may be subject to revisions, and must be passed into law, so these changes are not guaranteed at this time. However, many people are concerned about the effects the new tax reform bill
will have on them, particularly if they are paying or receiving maintenance (alimony) or may in the future. Therefore, we believe it is important to begin discussions of these possible changes as soon as possible.
The current tax law may allow for more money to be available to the parties for maintenance purposes as the higher income party may not be taxed at a higher income rate because he/she is paying a portion of that income to the lower income party, who will claim that maintenance as income at a lower income bracket. Because the proposed Tax Reform Bill will no longer allow the higher income party the ability to deduct those maintenance payments on his/her tax return, he/she may be taxed at the higher income rate, and there will be less income available to the parties when calculating support. In effect, the proposed Tax Reform Bill increases the amount of taxes paid by a divorced couple then what they would have paid previously because the tax bracket of the payor does not change.
This tax proposal has a far reaching effect to any case in the U.S., includingWisconsin, that requires one party to pay maintenance to the other party, regardless of when the final divorce order is entered. While an order to pay maintenance may exist before January 1, 2018, it will still be subject to modification in the future. Therefore, if either party requests that maintenance be modified, it will then be subject to the new provisions of the Tax Reform Bill. As a result, the paying spouse will then no longer be able to deduct maintenance on his/her income taxes.
There may be other aspects of the proposed Tax Reform Bill that could help off-set the effect of these changes to the tax code for divorce couples, such as the proposed increase of the child and family tax credit, and the proposed change in the tax brackets for all filers. However, it is difficult to say what else may effect parties who are divorcing, or are divorced, as it is not clear what the final bill will include, and how some of those provisions may effect divorcing parties.
These examples show why it is important to consider the proposed tax changes and resulting consequences related to support at the time of divorce, or when considering a modification of support. If you believe that you will need to address maintenance issues in your matter, whether it is before the date of divorce or in determining a modification of maintenance after divorce, call us at (414) 258-1644 to schedule a free initial consultation to discuss your case.