The relationship between tax reform and alimony

One way a divorcing couple tries to even out the financial imbalance a divorce causes is by establishing alimony-financial support from a former spouse who earns more income to the other spouse who perhaps earns lesser or has not been working for some time due to the marriage. Alimony is an important tool for parties trying to get back on their feet without having to worry about keeping the roof over their head.

As the law stands currently, the ex-spouse who is paying alimony can deduct it from their federal income taxes and the receiving spouse claims the payment as taxable income. The party paying and the party receiving are generally in different tax brackets and the government essentially supports the spouse receiving alimony as they receive more in actual dollars than the other party is paying. The result? The current law ends up benefitting both parties. But Louisiana residents may be aware that this situation is set to change with proposed tax reform bill.

The bill would end the tax deduction, making alimony tax-free for the receiving spouse. This law would apply for divorces executed next year, not for current divorces. This means the government would no longer help support the receiving spouse and may end up limiting the paying party’s ability to pay, as they may have other financial obligations to pay.

Judges keep in mind taxable income and deductibility when finalizing family law matters in a contested divorce. With the law changing, it is important to know how one’s alimony payments will be affected, whether one is paying or receiving it. It might be beneficial to consult an experienced attorney for guidance on how it could play out.