Speaker of the House Paul Ryan recently unveiled a much-anticipated tax reform proposal. The bill already has many supporters and detractors, divided mainly along partisan lines. While we have no interest in taking sides in this space, we do want to point out a section of the proposal that has so far received scant attention.
If enacted, the proposal would do away with the current federal tax deduction for spousal support (also known as alimony), a change that would rearrange many future divorce settlements.
As you probably know, the person who pays alimony can deduct the support payments from their federal income taxes. On the flip side, those who receive alimony are required to claim it as taxable income.
All of that would change under the proposal made by Ryan, House Ways and Means Committee Chair Kevin Brady, Florida's representative on the committee, Congressman Vern Buchanan and others.
Alimony would no longer be deductible and income from alimony would be tax-free. If the proposal is signed into law, the changes would affect separation agreements and divorce settlements effective after the end of this year. It would not affect divorces and separations executed before Dec. 31, 2017.
A family law attorney quoted in an Investment News article said that the change would complicate future divorce negotiations, especially for people in higher income brackets. Clearly, a tax deduction for spousal support makes it easier for people to agree to those arrangements.
We do not know if the proposal will be approved by Congress or not, but we look forward to hearing more about the details from proponents and critics in coming days.