New York residents making alimony payments right now may not be aware that the government is effectively subsidizing their payments. For example, if they are paying $10,000 a month and in the 50 percent tax bracket with the receiving spouse in the 30 percent tax bracket it would play out like this-the paying couple is paying a net amount of $5,000 and the receiving spouse owes $3,000 in tax.
The way the law applies right now, the receiving party gets $7,000 while the paying party is paying a net of $5,000. The government thus supports the receiving spouse by paying $2,000 a month. How does this work? The current law allows the paying spouse to deduct alimony as an expense in their federal income taxes, while the receiving spouse has to declare it as a taxable income. As a result, the divorcing couple, usually in different tax brackets, benefits from the situation as the receiving person receives considerably more in actual dollars than the paying individual. With the proposed tax reform bill though, this could change.
The new bill eliminates the deductibility of alimony. This means the government will no longer help the person receiving the alimony, leading to a decrease in the alimony they would receive. When children are involved, this would impact the receiving party's ability to care for their children and make ends meet.
Alimony is supposed to help the receiving spouse maintain a standard of living reasonably similar to what they were used to during their marriage. Courts frequently took into account taxable income and deductibles when making these decisions. With the elimination of the deduction, the paying couple's ability to pay will be limited and as a result, everyone might end up suffering. To understand how the change would affect a divorce executed sometime in the future, it could help to speak to an experienced attorney.