The Tax Switch that Could Speed Up December Divorces

A lesser-known section of last year’s Tax Cuts and Jobs Act will soon take effect, changing the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. treatment of alimony payments for divorces occurring after December 31, 2018. While the switch probably isn’t going to cause divorce, it might speed up divorces or separations that are already in the works.

Currently, alimony payments are deducted from the income of the paying spouse, and then taxed as the income of the receiving spouse. The new tax law will change this tax treatment for divorces occurring after December 31 of this year. For these taxpayers, alimony payments will no longer be deductible by the payer or taxed as income by the receiver. For divorces that occur before the switch, the old tax treatment will still apply.

Either way, only one spouse pays the income tax associated with the alimony payment. If both spouses had to pay income taxes on a $1,000 payment, it would in effect be treating $1,000 of income as $2,000 of income. Taxing it once is the appropriate neutral policy—but where to tax it is more ambiguous.

Given that the receiving spouse usually makes less income than the paying spouse, the receiving spouse usually faces a lower marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. —this can result in the divorced couple paying a lower tax bill for the alimony money than they would have paid on that same income while married. So the current tax treatment can modestly subsidize divorce.

Another problem with the deduction is the discrepancy between the amounts deducted and reported as income: In tax year 2016, taxpayers reported $12.6 billion in alimony paid, while reporting just $10.5 billion in alimony received. According to a 2014 Treasury Inspector General for Tax Administration Report, “Apart from examining a small number of tax returns, the [Internal Revenue Service] generally has no processes or procedures to address this substantial compliance gap.”

The switch will mean no modest subsidy for divorces going forward, and no reporting gap. The Joint Committee on Taxation estimates the switch will increase federal revenues by $6.9 billion over the next decade.

While the new tax treatment won’t likely affect spouses at the margin of “should we work this out or not,” the change could very well quicken the process for spouses at the margin of “should we do the divorce paperwork now or next month.”

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