Alimony payments mandated by South Dakota divorce agreements could lose their beneficial tax treatment.
The Tax Cuts and Jobs Act, unveiled on Thursday, would change the tax treatment of alimony. Alimony, also known as spousal support, is often part of divorce agreements when there's a big discrepancy in earnings between the two parties and the marriage has endured for more than a few years.
Currently, alimony is tax-deductible for the paying spouse and taxable to the receiving spouse. But if you get divorced after the plan is enacted, that would change - alimony would be paid out of after-tax dollars and would be tax-free to the recipient.
This change would tend to increase the total amount of tax paid by divorced couples, since the ex-spouse who pays alimony is typically the one with the higher income and who faces a higher tax bracket.
The bill summary for the tax plan offers this argument:
"The provision would eliminate what is effectively a 'divorce subsidy' under current law, in that a divorced couple can often achieve a better tax result for payments between them than a married couple can."
If the deduction disappears, it would affect divorce agreements entered into after 2017. Child support, which is separate from alimony, already offers no deduction.