GOP should divorce itself from alimony scheme in tax bill
A New York judge ordered Howard Gould to pay his ex-wife, Katherine Gould, $3,000 alimony per month for the rest of her life. Mrs. Gould had argued she should not be required to pay income taxes on alimony.
Over the next 10 years, Mrs. Gould fought her way up to the U.S. Supreme Court, which ruled alimony is not taxable income. But that was in 1917.
{mosads}Fast forward 100 years and the law is exactly the opposite. Today, if the Goulds were still alive, Mr. Gould would receive a tax deduction for paying alimony, and the payments received by Mrs. Gould would be included in her taxable income.
If the Goulds were still alive, Mr. Gould would tell you he has been stoked ever since the Revenue Tax Act of 1942 in which Congress overruled Gould v. Gould and allowed him to start deducting the alimony payments he made to Mrs. Gould.
She would likely tell us that 1942 was not the best of times. That’s because in 1942, Congress required individuals like Mrs. Gould, who received alimony, to include those payments as part of their taxable income.
When The Revenue Tax Act of 1942 became law, it required a “wife who [was] divorced or legally separated from her husband” to count the payments she had received as taxable income and her “husband is allowed a deduction” for making the alimony payments. For the most part, this law has hardly changed since 1942 but for gender-neutral language.
Proponents of the Trump tax plan seek repeal of the current law in favor of an “exclusion/nondeduction” alimony system. At first glance, one may believe Trump’s intended repeal of alimony deductions is aimed at providing tax relief to the lower-wage spouses by excluding alimony payments from taxable income. Many argue it has an opposite effect.
First, if you are already divorced or separated and receiving alimony, Trump’s tax plan does not apply to you. Only individuals divorced or separated after 2017 who receive alimony would be entitled to exclude the alimony they receive from taxable income.
The tax plan does, however, permit individuals who modify the terms of their divorce of separation agreements following 2017 to exclude the money from their taxable income.
But most seasoned family law attorneys are of the position that eliminating a tax deduction for high-income earners who make alimony payments would have unintended consequences on the low-income earning ex-spouses who receive alimony.
This is because the tax deduction for alimony payors creates a large incentive for high-earning spouses to pay larger alimony payments than they would under Trump’s proposed statutory scheme.
Trump’s tax plan also lacks awareness that higher-income earning spouses who would lose the deduction will likely ascend into a higher tax bracket. This ultimately results in a higher aggregate tax liability imposed on the parties. Translation: The higher earner has less cash to pay alimony.
This disparity in alimony payments is not necessarily offset by simply characterizing it as excluded from the recipient’s taxable income. This typically results in the spouse depending on alimony with less cash in the end.
This conclusion follows the position of the American Bar Association (ABA) Tax Section’s Task Force which was assembled in the 1980s to research the Tax Reform Act of 1984, which proposed a strikingly familiar exclusion/nondeduction repeal.
In the early 1980s, the Senate Finance Committee championed a repeal of the alimony deduction nearly identical to Trump’s tax plan.
In 1984, the ABA Task Force argued the exclusion/nondeduction repeal would not only harm wealthy individuals but also couples of lesser means. Especially because for less wealthy couples, alimony payments come from future paychecks — not the transfer of income generating assets that previously existed.
In fact, the language of Trump’s tax plan as it relates to alimony payments is nearly a verbatim rehash of the previously failed Tax Reform Act of 2014, which died in Congress shortly after its introduction.
When the Joint Tax Committee provided its technical explanation of the the Tax Reform Act of 2014, it stated its intent was to follow the Supreme Court ruling Gould v. Gould.
If Mrs. Gould was alive today she would probably be smiling at that. But she would more likely be disappointed to hear Trump’s proposed elimination of the alimony deduction would not apply to individuals divorced before 2018 — let alone 1907 (unless of course they subsequently modify prior decrees sometime after this year ends).
Donald Trump’s tax plan, the “Tax Cuts and Jobs Act,” was just approved by the House Ways and Means Committee. The Joint Committee on Taxation (JCT) estimates the repeal of deductions for alimony payments and the corresponding inclusion in gross income would result in an estimated additional $100m in Treasury revenue for the fiscal year of 2018.
Proponents of Trump’s tax plan would argue repealing the alimony deduction would result in higher Treasury revenues. But this goal seems to defeat the intent of Trump’s tax plan to provide “tax relief and simplification for the American family” by focusing on strengthening the middle class.
Edward Lyman is a California family law attorney with the firm Walzer Melcher, LLP. Walzer Melcher has handled some of the largest divorce cases in California and represents actors, athletes, entrepreneurs, executives and individuals.