Last Thursday, Republicans in Congress—nine of whom represent Tennessee—finally released the details of their proposal to modify the federal tax code, which they’ve named the Tax Cuts and Jobs Act.
If you aren’t familiar with the details of the GOP’s tax reform proposal, you should start by reading this detailed analysis from The Washington Post. Another Post article explains who wins and who loses under the proposal.
The gist is that congressional Republicans want to cut tax revenue by $5.5 trillion spread over 10 years. The lost revenue is made up by increasing taxes by $4 trillion, mainly by eliminating various deductions that are allowed under current law.
The remaining lost tax revenue of $1.5 trillion will be financed by increasing the national debt, i.e., borrowing an additional $1,500,000,000,000.00.
As The New York Times explains, the GOP’s proposal is “a potentially huge windfall for the wealthiest Americans. It would not directly benefit the bottom third of the population. As for the middle class, the benefits appear to be modest.”
This chart illustrates the distribution of benefits:
This change in after-tax income is achieved by eliminating many deductions and tax credits, two of which directly affect family law in Tennessee and elsewhere.
First, the GOP wants to eliminate the ability to deduct alimony payments. The summary of section 1309 (found here on p. 17) explains:
Current law: Under current law, alimony payments generally are an above-the-line deduction for the payor and included in the income of the payee. However, alimony payments are not deductible by the payor or includible in the income of the payee if designated as such by the divorce decree or separation agreement.
Provision: Under the provision, alimony payments would not be deductible by the payor or includible in the income of the payee. The provision would be effective for any divorce decree or separation agreement executed after 2017 and to any modification after 2017 of any such instrument executed before such date if expressly provided for by such modification.
• 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.
• The provision recognizes that the provision of spousal support as a consequence of a divorce or separation should have the same tax treatment as the provision of spousal support within the context of a married couple, as well as the provision of child support.
[Joint Committee on Taxation] estimate: According to JCT, the provision would increase revenues by $8.3 billion over 2018-2027.
In an alimony case, the payor necessarily has more income than the recipient. This often means the payor is in a higher tax bracket than the recipient. By forcing the party in the higher tax bracket to pay tax on the alimony, additional tax revenue is generated.
Alimony requires assessing both the recipient’s need and the payor’s ability to pay, among other things. The Republican proposal could reduce the payor’s ability to pay by the amount of the additional tax, thereby reducing the amount of money available to the relieve the need of the recipient.
In other words, the party in need of alimony may receive less in order to finance tax relief that largely benefits the wealthy.
Second, the GOP wants to eliminate a one-time tax refund for parents who adopt children from foster care, internationally, or through private domestic adoptions. For 2017, the federal adoption tax credit is $13,570.
Details of the repeal of the adoption tax credit can be found in the summary of section 1406 (found here on p. 21). The Joint Committee on Taxation estimates the change would result in increased revenues of less than $50 million over 10 years.
Several Republican lawmakers have criticized this proposal as anti-adoption and, therefore, inconsistent with their claims of being “pro-life.”
Considering the nominal tax revenue that would result from eliminating the adoption credit and the opposition from influential members of the Republican caucus, I predict this particular provision will not make it into the final bill.
What are your thoughts on the Republican tax proposals? Please share your opinions in the comments below.
Hat tip to Jeff Day, CPA, for alerting me to this issue.