Since the unveiling of U.S. House Republicans’ tax reform bill, there has been a lot of buzz on the elimination of various deductions and credits and the impact on the average family if the proposed reform is passed. In reviewing the bill to determine whether my own family would benefit, I noticed a provision that would greatly affect my family law clients who are ordered to pay spousal maintenance after Dec. 31, 2017.
Currently under the tax code, any person who pays spousal maintenance receives a deduction for all payments made. The recipient of the spousal maintenance must report the payments as income and is consequently taxed on the income received. Section 1309 of the reform bill would eliminate the tax deduction for the payer and provide the recipient with tax-free income.
I was a bit confused about the reasoning for proposing to eliminate the deduction. I asked myself whether House Republicans believe the added revenue would really impact our nation’s bottom line. (The concurrent Senate bill would keep the deduction in place.)
The Republicans should focus on the real impact the elimination of the spousal-maintenance deduction would have on families going through a divorce. That’s the world I live in every day as a family law attorney. The elimination would create many unintended consequences for divorcing families, including the challenge of negotiating equitable settlement agreements. As one can imagine, the idea of paying spousal maintenance is not easily embraced by a spouse who potentially has to pay his or her soon-to-be-ex. It’s a hard pill to swallow for many. While divorces among younger generations have measurably decreased, divorces among those 50 and older have nearly doubled. In Minnesota, the court looks at the length of the marriage as one factor for awarding spousal maintenance. A long-term marriage is more likely to have an award of spousal maintenance, especially if there is a large income disparity between the spouses.
In negotiating a spousal-maintenance payment, I use the tax deduction as a bargaining chip. If I am representing a client who may have to pay spousal maintenance, the deduction helps them accept their reality a little more easily. On the other hand, if my client is the recipient, I know I can negotiate a higher amount knowing that the payer will have the opportunity to deduct the amount on his or her tax return.
Not only does the deduction soften the blow of having to pay spousal maintenance, but it also has a huge impact on the cash flow of recipient families. The deduction is an important tool to increase the after-tax cash flow available to these families and their children. To complicate matters, in Minnesota the spousal-maintenance payments are tied into the current child support calculation. Currently, the payment is deducted from the payer’s gross income, which then lowers taxable income because of the tax deduction. The payments received by a recipient are considered taxable income for purposes of calculating child support. The child-support calculation would have to be completely overhauled if the tax reform bill passes.
If the House Republicans’ tax reform bill is passed with Section 1309, I am afraid it not only will create a financial strain on the payer but will decrease the amount received by the recipient, who financially depends on the spousal maintenance to support the family. If the bill passes, the payer will have to pay spousal maintenance and child support using after-tax dollars. Unfortunately, I believe the real unintended consequences of Section 1309 will be the effects it will have on the children of divorced families.
Beth Wiberg Barbosa, of St. Paul, is an attorney.