The Republican party's recently unveiled tax plan comes with an unexpected surprise: what some are referring to as a "divorce penalty." However, calling it a penalty might not be entirely accurate. What one spouse sees as a penalty might be a benefit to the other spouse, so a closer look at the impact of this proposed change is important.
Changing Who Gets Taxed For Alimony
Currently, when alimony, known in Ohio as spousal support, is awarded in a divorce, the payor can typically deduct the amount from their income for tax purposes. The payee then needs to include the payment as income and pay taxes on it.
The proposed change shifts the tax burden from the payee to the payor. In other words, the payor would not be able to deduct it. They would have to pay tax on the amount. The payee would then not be taxed for it.
Unfortunately, according to an article from Investment News, the matter is not as simple as simply shifting the tax burden. It may change the dynamics of divorce negotiations completely. For example, the payor spouse, knowing that the amount of spousal support would be deducted from their income and not taxed, might be less inclined to go to battle over it. With the change, alimony payments may be more hotly contested.
Whether the change goes through or not, divorcing spouses need to recognize the impact of taxes if spousal support is going to be a factor.