The final version of the alimony deduction tax plan, which was released Friday and is set for votes next week. This move could make ending marriages an even more drawn-out and expensive process, and the change could be particularly painful for lower-income couples.
If the alimony deduction tax bill becomes law, the alimony deduction repeal would affect divorces carried out after. The new rule wouldn’t affect anyone already paying alimony.
But it’ll mean big changes for divorce proceedings in the years ahead.
Prior to this going into effect — if you are paying your ex $3,000 a month in alimony – and your tax rate is 33%. The deduction benefit at tax time reduces your alimony payments to $2,000 a month.
For your ex, let’s say they are in the 15% tax bracket. The $3,000 check your ex receives is taxable income so after they pay $450 in taxes, their net payment is reduced to $2,550 per month. Ultimately, your ex is paying taxes, not you. You get the deduction benefit.
Under the proposed change, you will no longer be able to deduct alimony payments. This could also increase your tax bracket. Overall, with the same alimony payments, it would cost you $2,550 per month instead of $2,000. An increase of $550 per month. Your ex would no longer pay taxes on the alimony – rather you will pay taxes, for them.
In this scenario, you would be paying an additional $100,000 over a 15 year period.
Under the proposed change, alimony agreements in place prior will be grandfathered as well as the tax benefit for the payor.
What is my current advice? If the change goes into effect and you are considering a divorce that would involve alimony – you should speak to an attorney to help make an educated decision, sooner than later.