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Margie: Family law attorney Jonathan Marks with The Marks Law Firm is here this morning to break down what it means if it were passed as it looks right now. Good morning to you.
Jonathan: Good morning, Margie.
Margie: First off, of great concern is spousal support, or maintenance. How is it taxed right now?
Jonathan: So if you’re paying maintenance, what other states call alimony here, you get a deduction. So let’s assume you’re making $100,000 per year, you’re paying $10,000 per year in maintenance to your former spouse, your adjusted gross income on your tax return is only $90,000. So whatever your tax bracket is, you’re at least getting that deduction so that even though you’re paying it on a monthly basis, you’ll recoup a percentage of it, under that example about 35 percent, of it back on your taxes every year. But what they’re proposing would change that dramatically.
Margie: Yeah, so what would it look like under the new law?
Jonathan: So under the same circumstance you wouldn’t be able to write anything off. So you would have an income of $100,000, you’d still be paying that maintenance to your former spouse of $10,000 a year, but you wouldn’t get to write it off. So your adjusted gross income is going to remain the same, and as such what you used to be able to do and have that as a taxable benefit and use it at the end of the year every April, you’re not going to be able to do that anymore if this law was to pass.
Margie: What does that mean for current court orders?
Jonathan: So current court orders are going to get grandfathered in, meaning as long as you never modify it, you’re still going to be able to write off that maintenance order. However–and that’s a big however–if you ever have to go back and modify it, so assume you’re paying $2,500 a month in spousal support, you want to go back, your job changed, you’re going to retire, and you want to go back and have that maintenance reduced, the moment you go back and you try to get it reduced, that modification would fall under the new tax law that’s being proposed and you lose the ability to deduct. So you may gain on what you’re paying less per month, but you may end up losing overall by the taxable consequences being removed.
Margie: Yeah, you have to look long and hard at that. What kind of impact could this have on divorce settlements and judgments?
Jonathan: Yeah, so a lot of times with the maintenance aspect of it, you’re having to explain to your client what the overall dollar amounts are being as they flow back and forth. If you lose this ability to negotiate on the taxes, you’re looking at changes as to maybe how you’re negotiating on child support, how you’re dividing property, and also, realistically, how you’re looking at things from a longer term perspective. So sometimes with the maintenance aspect, if you’re trying to get it in to whether it’s calculated on a short-term contractual, or if it’s open-ended, those things are going to all change and you’re going to start to say, well maybe it’s better that you get a larger property settlement and avoid the taxable consequences. Or if you’re the payor, you’re saying to them, instead of having to worry about this tax issue, maybe you should just give up a little bit more of something that exists today in your property.
Margie: On the surface this sounds crazy. So what are the bill’s sponsors saying about this? Why do they think this is a good idea?
Jonathan: Well, they seem to think that you get a benefit when you get divorced for this tax situation. So for some reason the thought process going through the House is that people are using this ability to save money on their taxes by getting divorced and paying spousal support to their former spouse, which is preposterous. I mean, if you took a survey I can’t imagine you’re going to find five percent–let alone 100 percent–of people who are saying, “I’m willingly paying spousal support to my former spouse.” So what it’s really doing is now it’s creating a divorce penalty, and so if you were to get divorced and you have a situation from an income perspective where you’re going to have to pay this spousal support, you as the payor are now getting penalized because you’re paying taxes on it there and it’s your normal gross income. And then still the individual receiving the spousal support is having to pay tax on it too. So the government is picking it up, but you as a divorced couple, you’re losing out.
Margie: Alright, Jonathan Marks, thank you so much for your time this morning.
Jonathan: My pleasure.
Margie: Certainly let your representatives in Congress know if you do not agree with this proposal. And for more information on The Marks Law Firm, just head to the STLMoms tab.