The Flip and Flop of Taxing Alimony

Abstract

Since the dawn of income taxation in America, the tax treatment of alimony payments has flipped, flopped, and flipped again. The tax burden was first borne by the person paying alimony, then by the person receiving it. The burden has since shifted back to the alimony payor. This, we argue, was a flop.

The Tax Cuts and Jobs Act of 2017 eliminated a tax deduction for alimony payments that served to reduce the taxable income of the payor and shift the payments into the taxable income of the recipient. Congress justified this deviation from the longstanding deduction/income treatment based an old Supreme Court case that held alimony was to be taxed to husbands as part of their moral and legal obligations to support their wives. More likely, Congress was acting for its own benefit—eliminating the deduction is estimated to raise billions for the fisc.

In this Article, we argue that this change was a mistake. Treating alimony payments as income to the recipient better comports with the Tax Code’s progressive rate structure and the concept of taxing a party based on “ability to pay.” The argument proceeds in two parts. First, we argue that alimony payments do not constitute consumption by the payor. Thus, like gifts, alimony payments should only be taxed to one of the parties involved in the transfer. Existing scholarship seems to coalesce on this point. Still, this does not tell us whom to tax: the alimony payor or the recipient? Distinguishing the income tax treatment of alimony from that of gifts, we argue the latter. 

As a theoretical matter, allowing a deduction for alimony payments aligns with our progressive rate structure by accounting for the payor’s lower marginal “ability to pay” after making alimony payments. These payments represent future consumption by the recipient, not the payor, and thus reflect an increase in the recipient’s “ability to pay” taxes on such sums. And, as a practical matter, allowing parties the flexibility to allocate the tax burden among themselves is a negotiating chip that may grease the wheels in other areas of the divorce settlement process. We recommend that Congress flip once more and return the tax treatment of alimony to what it was prior to the 2017 Act reform.