Alimony payments mandated by South Dakota divorce agreements could lose their beneficial tax treatment.
The Tax Cuts and Jobs Act 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.
Consider a happily married couple, Bob and Judy. Bob makes $80,000 a year as a university professor. Judy makes $20,000 a year through her Internet jewelry business.
Bob and Judy have no children. Under the new plan, they would take the standard deduction of $24,000 and have a tax bill of $8,520.
Their taxes are fairly modest in part because, under the new plan, married couples face a tax rate of 12% on the first $90,000 of taxable income, and only $76,000 of their income is taxable. They also get $600 in "family flexibility credits."
After fifteen years of marriage, Bob and Judy decide to divorce.
Bob is now a single man with an income of $80,000. His tax bill is now $10,850 - more than the couple's combined tax bill when they were married, because for a single person, the 12% tax bracket covers only the first $45,000 of income. Now, a lot of Bob's income is taxed at 25%.
Judy's tax bill is much more modest - just $660 on her income of $20,000. Bob is paying her $15,000 a year in alimony on top of that, but she doesn't pay any tax on it.
All told, Bob and Judy are now paying $11,510 in federal income taxes, a 35% tax increase over when they were married - plus, they have to maintain two homes.