As Congress pores over prospective tax cuts, worried Americans obsessively analyze the impact these changes might have on the middle class. Projections offer extensive insight on future tax returns, but with the assumption that those impacted by upcoming changes are either single or married.
What about divorced taxpayers? Turns out, some divorcees could see significant tax hikes should the proposed plan go into effect. Read on to learn more about possible changes—and how to plan accordingly:
Under the new tax proposal, alimony would be tax-free for the recipient and paid from after-tax funds for the other spouse. Typically, the paying spouse earns more, so this arrangement could increase the total amount divorced couples pay each year.
According to proponents, the new bill aims to eliminate a current ‘divorce subsidy’ in which divorced spouses can allegedly achieve better tax results than married couples. The bill’s summary indicates that this change would result in the collection of an additional $8.3 billion over the next decade.
Proponents of the tax bill and its eliminated ‘divorce subsidy’ believe that lower-earning spouses would actually benefit from anticipated changes; under the new bill, they will no longer be taxed on received alimony. Skeptics, however, argue that even the lower earner would lose in the long-term, as tax deductions for paying spouses encourage higher alimony payments.
Making the Most of Proposed Tax Changes
If you’re currently in the midst of divorce, it may behoove you and your spouse to wait on alimony arrangements until you understand the full scope of the tax bill. In select situations, a lump sum settlement may prove preferable to traditional alimony payments. Other spouses may opt for unallocated support, a rare but occasionally useful alternative to typical alimony and child support resolutions.
While there is no guarantee that the current version of the tax bill will pass or be signed into law, changes in tax policy could definitely be afoot for divorcees. It’s worth taking these potential adjustments into account as you discuss alimony. A resolution that may have favored one spouse in the past could now benefit the other. More likely, however, your future alimony agreement will hurt both sides.