Historically, maintenance payments (called alimony in the Internal Revenue Code) are deductible by the payor and taxable to the recipient, as long as certain requirements are met. That history may be changing with the tax code revisions now being considered by Congress.
The U.S. House of Representatives has passed a tax reform bill that eliminates this tax deduction, meaning that the recipient of maintenance would not need to report those payments as income and the payor of maintenance would not receive those payments as an above-the-line tax deduction. While a Senate bill has not yet passed, preliminary drafts from the Senate do not eliminate this deduction like the House bill does. It therefore remains unclear whether the elimination of the alimony deduction will become law. It also remains unclear whether any change in the tax laws will apply only to future court orders or whether it will also apply to existing court orders.
Why is this important?
Since maintenance flows from the higher income spouse to the lower income spouse, the deduction helps to create greater disposable income for the family and aids in the settlement of maintenance issues. The loss of the deduction may well make settlement more difficult, since the higher earning spouse will no longer receive a tax break for the payments, thereby impacting that person’s disposable income.