MEMPHIS, Tenn. - A Memphis-area divorce attorney is warning estranged couples about a proposed change in the tax code that could cost divorced couples thousands of dollars each year.
Caren Nichols told FOX13 the change would be an added headache for families already in turmoil.
“If traditionally, a wife may have gotten $3,000 of alimony before, now she's going to be looking at a lesser amount of alimony,” Nichols said.
The tax reform bill being debated by republicans in Congress would eliminate the tax deduction that divorcees receive on their payments to ex-spouses, CNN reported.
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Currently, alimony is taxed according to the tax bracket of the receiving spouse, which is traditionally the spouse who earns less money per year. Under the new plan, alimony would be taxed according to the higher earner’s tax bracket.
“It's going to be taxed at the highest percentage, rather than the lowest percentage,” Nichols said.
Consider a couple named Joe and Jane, who plan to divorce next year.
Joe makes $100,000 per year. For simplicity of this example, we’ll say he’s taxed at 35 percent. Jane makes $30,000 per year. For simplicity of this example, we’ll say she’s taxed at 15 percent.
If Joe agrees to pay Jane $20,000 in alimony each year, currently that money would be taxed according to Jane’s tax bracket, which would leave Jane with $17,000.
Under the new tax plan, alimony would be taxed according to the spouse who earns the most money. In this case, if Joe is taxed at 35 percent, Jane would get $13,000 in alimony, shorting the couple of $4,000 they would receive with the tax break.
“They’re going to lose that amount of savings that the both of them used to benefit from,” Nichols said. “They're going to have to allocate the savings they lose somewhere between the two people.”
Couples whose divorces are finalized before the end of 2017 are grandfathered into the current tax plan, and their alimony payments will not be impacted by the proposed legislation.
“If you've already received your final decree of divorce, you are grandfathered in the way it's currently written and you don't have to worry about it,” Nichols said.
Couples who divorce after Dec. 31 will have to consider the new rules.
“They're going to have to relook at the alimony amount that they pay,” Nichols said. “They need to go check with their lawyers right now.”
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