In many Michigan families, one spouse earns more than the other. In some cases, one individual works at home to take care of the family while the other pursues career opportunities. In other cases, one individual’s career simply is more lucrative than the other’s. Both spouses contribute to the family buy in different ways. This difference in financial compensation and contribution to the family can be accounted for in a divorce situation through the payment of alimony.
Under current tax law, the individual who makes alimony payments is generally able to take these payments as a tax deduction. Typically, this individual is in a higher tax bracket. Thus, the tax deduction helps to offset some of the cost of alimony. Likewise, the individual receiving alimony must claim this amount as income for tax purposes. Again, since this individual is typically in a lower tax bracket, taxes on this money are generally less.
However, there is a new legislative proposal that could change all of this. Under the new proposal, the individual paying alimony will no longer be able to claim it as a deduction. He or she will go ahead and pay regular income taxes on it. Additionally, the individual receiving alimony will no longer be required to claim in as income. The net effect of this change is an estimated $8 billion in tax revenue.
As the Michigan divorce is negotiated and settled, the courts look at the tax ramification of alimony in determining the amount to be paid. This proposed change in tax law will have a significant impact upon all involved. An experienced divorce attorney can assist in analyzing the way this impact will affect the individual and the best way to address the possible changes.
Source: Forbes, “How Tax Reform Could Radically Change Divorce“, Malcom S. Taub, Nov. 9, 2017