Hidden within the so-called tax reform bill is yet another indicator of the Republican party’s pandering to its so-called “conservative base.” In addition to the bill allowing expectant parents to make contributions to a 529 account for a fetus, there is also the penalty to be imposed on those getting divorced and the additional impact on their children. Specifically, the House bill seeks to eliminate the deduction for spousal support or alimony.
The bill is intended to eliminate the deduction on any settlement or judgment that is executed after December 31, 2017. The bill would have a major impact on those persons who are presently involved in divorce proceedings where an agreement on support is not reached before year-end, and on those who initiate proceedings after the first of the year.
The impact of this change in the law is significant. For many years, the Internal Revenue Code has allowed a support payor, in most circumstances, to deduct the entirety of spousal support payments. The recipient must pay income tax on that support. Because the higher earning spouse has received a tax break for the payment, the amount of support paid is higher than it would be if the support were not tax deductible. And while the recipient spouse has had to pay income tax on that which he or she received, because that spouse is often in a lower tax-bracket, the deductibility of support was used as a tool to generate overall tax savings thereby increasing the amount of available cash between the two households.
The disallowance of the deduction is going to result in reduced money available to supported spouses. But that is not the only impact. The secondary fallout in states like California is the impact on child support, which has never been tax-deductible. Given that the support guideline attempts to apportion net (after-tax) monthly disposable income between parents, child support awards which take into consideration the receipt of spousal support are going to end up being lower as well. The reason for this is that the child support formula in California is built on the premise that a parent with higher tax deductible expenses has greater income available to pay support. If the higher earner has a higher tax bill, then the child support payment is going to be reduced.
The fallacy of believing that making life after divorce more costly will deter divorce itself is just that. What this bill ends up doing is penalizing just about everyone affected by a divorce – including the children who have nothing to do with the situation in the first place.