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Proposed tax plan would eliminate alimony deduction

If you're contemplating divorce or in the midst of one, you've likely heard that the tax bill that's currently being considered in Congress includes a provision to eliminate the tax deduction for people who pay alimony. Further, alimony would no longer be taxed as income for those who receive it.

The proposed changes would apply to anyone whose divorce agreement is finalized after Dec. 31 of this year. It hasn't been determined whether they would apply to current spousal support agreements that are amended after year-end 2017.

The House of Representatives' version of the tax bill passed this month with those changes included. It's now in the hands of the Senate. The changes that impact alimony aren't included in the current Senate version.

The proposed tax changes might seem on their face to hurt only those required to pay alimony because they could no longer deduct potentially thousands of dollars a year on their taxes. Alimony recipients would no longer have to declare those payments as income, and therefore, possibly move into a higher tax bracket. However, people on both sides of the equation could suffer.

The American Academy of Matrimonial Lawyers has announced its objection to the proposed changes. The group's president called spousal support "a valuable resource that needs to be further strengthened and not diminished by our representatives."

Those against eliminating the deduction argue that without it, those who pay alimony would have less available money, and therefore less to pay to their ex-spouses. As one attorney noted, the proposal is "likely to increase the family's tax burden and make less money available to the divorced spouse and children."

Since women are more often the recipients of spousal support than men, the National Organization for Women (NOW) also weighed in against the proposal. NOW's president said, "We are really concerned because it would make tough, tense negotiations between couples even worse." One attorney agreed, saying, "If they realize they might not get the deduction, they might not be willing to pay so much."

Whatever happens with these proposed tax changes, it's essential for the paying and receiving spouses to understand the full financial impact of spousal support on their incomes and taxes as negotiations begin.

Source: Fox Business, "Divorcees warily eye GOP plan to cut alimony tax deduction," Dave Collins, Nov. 16, 2017

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