Tax reform could shrink alimony for ex-spouses

Personal Finance

The new tax legislation essentially would shift much of the taxation from the recipient to the alimony payer.

“Due to the disparity in tax rates that exist in these cases, this would have a negative effect on the payee. That’s the bottom line,” said Malcolm Taub, co-chair of Davidoff Hutcher & Citron’s Divorce & Family Law Group in New York.

Because the ex-spouse receiving the alimony typically is in a lower tax bracket, the amount of tax paid by the recipients — the majority of which are women — on the spousal support is less. And it’s something that courts, attorneys and divorce planners take into consideration when divvying up assets.

For illustrative purposes: Say the ex-husband is paying $3,000 in monthly alimony and is taxed at 33 percent. In effect, the deduction at tax time reduces each of those payments to $2,000.

On the receiving end, say the ex-wife is in the 15 percent bracket. The $3,000 she receives is reduced by $450, which goes to taxes, leaving her with $2,550.

Under the proposed change, providing the ex-wife with the same level of support would cost the ex-husband $2,550 instead of $2,000.

“I don’t think courts could award the same amount, given that it wouldn’t be deductible,” Taub said. “There’s only a limited amount of dollars in the pot.”

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