What are the implications of the planned tax reform on alimony?

What are the implications of the planned tax reform on alimony?

The ball is in the church! Minister Van Peteghem has approved the first phase of a comprehensive tax reform presented. A reform that represents an unmistakable impact will have on divorces. Existing agreements and court decisions may have to be thoroughly revised, which may reopen old discussions and disputes.

Our specialists in the Department of Personal and Family Law set out the implications of the planned tax reform on maintenance payments for the benefit of an ex-spouse or children already set out for you.

Can I deduct maintenance fees paid from my taxes?

Yes. If you meet four cumulative conditions today, you can deduct maintenance money paid from your joint net taxable income.

1. You must pay maintenance money under either the Civil or the Judicial Code or a similar provision in foreign law;
2. The recipient of maintenance payments must not be part of the family of the person paying the benefit;
3. Maintenance fees must be paid regularly; and
4. You must be able to justify the payment with evidential documents.

If you meet these conditions, until today, as a maintenance obligated former spouse, you can deduct the maintenance contribution paid up to 80% from your taxable income.

Do I have to pay taxes on maintenance money received?

Yes. Until today, alimony received is considered ordinary income making 80% of the alimony received effectively taxable.

What is the purpose of the planned tax reform?

The above scheme is going to be shaken up by the planned tax reform. The existing system is hardly neutral. Whoever pays a maintenance allowance today can contribute it for tax purposes. Whoever receives the benefit is taxed on it. It is this distinction that Minister Van Peteghem is trying to address with his tax reform. From the objective making family taxation fairer, the entire maintenance allowance system will disappear from the tax system.

The deductibility and taxability from maintenance payments will thus be eliminated. This reform will take effect from January 1, 2024, so the reform will only effectively affect maintenance funds that are after December 31, 2023 were paid or granted.

To ensure legal certainty, provision is made for a transitional of 20 years. Maintenance payments that before 31 December 2023 were first granted or paid will be subject to this transitional arrangement.

Beginning in tax year 2045, maintenance contributions will generally no longer be taxed or deductible.

Decision

This tax reform will have a significant impact on court proceedings and agreements. Current judgments, rulings and agreements took into account the current tax treatment of maintenance payments. Although a transitional arrangement was provided for, the reform may reopen discussions and disputes.

At Bannister Lawyers, the proposed reform was thoroughly analyzed in order to adapt our advisory services to the new tax reality and to cushion the impact of this reform for you.

If you have questions regarding the implications on your tax position, you can always contact one of our specialized attorneys.