Divorce Mediation Blog

Bullish on Alimony 2: “After” the Fiscal Cliff

Wednesday, January 02, 2013

Working people turned out the lights on New Year’s night with the U.S. House of Representatives scrambling to avoid blame for a January 2d bear market. As we slept, House Republicans swallowed their hubris for a day, approved the latest federal tax fix (sort of); and they solemnly vowed to fight another day.

As we slept, present and future alimony payers in the “the 1.5 per cent” cohort (those with income above $400,000.00 per year or $450,000.00 for joint tax filers) gained 4.6 points in the value of their spousal support “tax shelter”. As we suggested in an earlier blog entry, this 13.1 per cent increase in the value of the high earner’s tax deduction is the result of the increase in top marginal tax rate from 35 to 39.6 per cent, now a reality.

But, didn’t the Congress resume the Bush era high-income itemized deduction phasedowns, negating this ironic windfall? The answer is “yes”, deduction limits did resume for taxpayers above $250,000.00 (according to media reports); yet it does not matter for alimony payers, because the alimony deduction is actually not a deduction at all, but is, rather, an “adjustment” to income. As such, the alimony deduction is not subject, so far as we know, to the phasedown provisions at all. All 2013 payers can continue to claim adjustment for all alimony paid.

At the same time, while the federal government increased its alimony subsidy for high-end alimony payers (small comfort perhaps in view of the overall tax hike), only the very few alimony recipients who have incomes above $400,000.00 will face any corresponding increase in alimony taxes. To be sure, more alimony dollars received may become subject to taxation for those payees with overall income above $250,000.00 by reason of reduced access to itemized deductions, but the number of taxpayers fitting this description is few indeed.

To most, this is a minor facet of the latest tax act, given the limited number of dollars lost to the treasury. We do wonder, though, if this change of tax balance between payers and payees will impact modification of old alimony orders. Will it affect alimony deals to be negotiated in the future? Given the number of moving parts on high-end parties’ tax returns, only time will tell.

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