The Effect of the 2017 Tax Bill on Divorce
President Trump and the Republicans have advocated for the elimination of the income tax deduction for the payment of alimony. The Republican party’s reasoning for eliminating that income tax deduction is that it is being exploited by the wealthy in their divorces. The result of the elimination of the spousal maintenance deduction, however, will create more income tax for the federal and state governments and negatively affect those in the middle class who pay a majority of spousal maintenance. The republican premise for the elimination of the spousal maintenance deduction is flawed and actually hurts the middle class.
I have been a divorce attorney for over 20 years and can attest to the fact that neither I nor any family law attorney with whom I have had a case has ever raised a discussion on how we could game the Internal Revenue Service with a strategy to increase spousal maintenance for a tax benefit. There simply is no beneficial reason for doing so.
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If an attorney represents a wealthy divorce client, the chances are that no spousal maintenance will be paid. The reason for this is because the spouse of that wealthy person will receive so much property and cash or cash equivalents that he or she will not have a need for spousal maintenance. It would, likewise, make no sense and would arguably be malpractice for an attorney to negotiate an arrangement whereby the wealthy party retains more of the assets in exchange for a contrived spousal maintenance award which may or may not be paid in the future due to the death of a party or the remarriage of the spouse receiving alimony. There is no reason a person would accept less of the assets they can receive now for a promise of future payments from the other spouse. Although some divorces are amicable, I have seen no reason a spouse would subject themselves to unknown risks for the tax benefit of the spouse there are divorcing.
As in most cases, you can find the answer to a question by following the money. The person paying alimony always has greater earnings than the spouse receiving alimony. As a result, the spouse paying alimony is always going to be in a higher top tier marginal income tax rate. Under the present law, the higher earning spouse paying spousal maintenance is able to deduct that alimony from his or her income takes which reduces the payment of his or her income taxes at their highest marginal income rate while the spouse receiving the alimony pays income taxes at a much lower marginal income tax rate. The result is the government receives less income tax. By eliminating the income tax deduction, the person paying alimony will be taxed at his or her highest marginal income tax rate resulting in more revenue to the internal revenue service.
Why will this impact the middle class? That is easy to answer. People in lower economic classes do not, as a general rule, pay alimony. Those in the highest economic classes, as a general rule, do not pay alimony either because the other spouse typically receives so much in assets, investments, and financial accounts that they do not qualify for alimony. The middle class, however, is a much different story. They typically do not have enough assets in the divorce settlement to support themselves and one spouse may be the breadwinner. As a result, someone earning $100,000.00 to $500,000.00 a year or more will be most affected by this portion of the 2017 tax bill.
All of this should be no surprise to law-makers and I suspect it is not. This may be an example of how the Republicans provide tax breaks for the wealthy and finance those in a lower economic position with a subsidy from the middle class in the form of the elimination of deducting alimony.
Chris Hildebrand wrote this article to ensure everyone has access to information about family law in Arizona. Chris is a divorce and family law attorney at Hildebrand Law, PC. He has over 24 years of Arizona family law experience and has received multiple awards, including US News and World Report “Top Arizona Divorce Attorneys”, Phoenix Magazine “Top Divorce Law Firms”, and Arizona Foothills Magazine “Best of the Valley” award. He believes the policies and procedures he uses to get his clients through a divorce should all be guided by the principles of honesty, integrity, and, quite frankly, actually caring about what his clients are going through in a divorce or family law case. In short, his practice is defined by the success of his clients. He also manages all of the other attorneys at his firm to make sure the outcomes in their clients’ cases are successful as well.