The recently-proposed GOP tax plan eliminates an above-the-line deduction for alimony payors. This proposal would reverse 75-year-old legislation that protects spousal support payors, and divorcing families in general, with a significant tax break.

Characterizing the existing deduction as a "divorce subsidy", the House Ways and Means Committee proposal, at section 1309, states:

Alimony payments would not be deductible by the payor or includible in the income of the payee. The provision would be effective for any divorce decree or separation agreement executed after 2017 and to any modification after 2017 of any such instrument executed before such date if expressly provided for by such modification.

One of the Committee's stated considerations in proposing the elimination of the alimony tax deduction is that a divorcing couple receives better tax treatment than a married couple under the current tax code.

In their commentary on the House proposal, joint-committee legislative staffers had this to say about section 39:

Under the proposal, alimony and separate maintenance payments are not deductible by the payor spouse. The proposal repeals sections 61(a)(8) and 71 of the Code. These sections specify that alimony and separate maintenance payments are included in income. Thus, the intent of the proposal is to follow the rule of the Supreme Court’s holding in Gould v. Gould, in which the Court held that such payments are not income to the recipient. The treatment of child support is not changed.

Well, we here at the Law Blogger note that the SCOTUS case relied on by the legislative staffers was decided in 1917, and was subsequently wholly supplanted by IRC sections 61(a) and 71.

Today, the Senate releases its version of the tax proposal. Legislators in both chambers point-out that the specific tenets contained in the proposals, including section 39 of the House plan, are up for discussion.

To the extent that the provision would require the support payor to pay his obligation with after-tax dollars, it hurts divorcing families just as they are at their most financially vulnerable. A spousal support recipient will always have a lower marginal tax-rate then the support payor.

Although the support recipient currently pays taxes on the "income" received in the form of alimony, that payee pays significantly less in taxes due to the lower marginal rate. By closing this gap, the GAO estimates the United States would re-capture approximately $8.3 billion in additional tax revenue over the next decade; truly, the proverbial "drop-in-the-bucket".

This government savings would come at great cost and confusion to divorcees, say many divorce and tax professionals. The loss to the payor under the proposal would be much greater than the paltry gain to the payee. Some critics of the GOP's plan say this amounts to a morality-tax imposed on divorcees.

As a policy matter, elimination of the alimony deduction cuts against the progression and liberalization of divorce laws since the 1950s, seriously complicates spousal support negotiations, and would, in most cases, hurt both the support recipient and the payor. If the alimony deduction is eliminated, spousal support negotiations would become an exercise in "sharing-the-pain".

We will do what we do here at this blog; monitor the legal developments and report-back to our readers.

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