Trump’s new tax plan eliminates the deduction currently available for payors of spousal support.
Under the Tax Cuts and Jobs Act, for all family law orders made after Dec. 31, 2018 (the end of THIS year), spousal support (aka alimony) will no longer be deductible for the payor, and income taxes won’t need to be paid on it by the recipient.
This reversal on the taxability of support (i.e., the removal of the preexisting income-shifting treatment for alimony paid between spouses) will greatly increase the tax burden on spouses paying support, and therefore will reduce the amount received by the spouse in need of financial assistance. (Currently, even though spousal support is taxable as income to the receiving spouse, that spouse avoids having to pay any taxes, or only pays minimal taxes if any, because of the low tax bracket s/he is in, combined with the itemized and standard deductions that reduce his/her taxes owed.)
Many couples are expected to be rushing to get their divorces finalized in 2018 to avoid these new tax issues. This is particularly important if the marriage consists of one high wage earner and one nonworking spouse.
- New Spousal Support Payments will no longer Tax-Deductible
Federal tax law has long provided that spousal support payments are generally taxable to the recipient and deductible to the payor. For over 75 years, divorcing couples (and divorce attorneys) have relied on this treatment of alimony.
The “Tax Cuts and Jobs Act” (TCJA) passed in December 2017, eliminated the tax deduction for alimony payments for spousal support orders made or modified after January 1, 2019.
This means that President Trump’s recently passed tax code will abolish tax deductions on alimony (spousal support) for divorce decrees (or court judgments or orders) entered on or after Jan. 1, 2019. This will have a significant impact on high wage earners who are ordered to make large spousal support payments.
It will also apply to spousal support orders that were made previously, but which are modified on or after January 1, 2019.
When the new law applies, newly-ordered spousal support payments will no longer be deductible expenses for the payors. This means that the benefit of lowering the payor’s taxable income (and thus raising his or her net retained income) will no longer be realized through the paying of spousal support. Thus, the actual costs of the support payments will be higher than if they were income tax deductible.
2. Support Orders made before January 1, 2019, are not affected by the new law
The new rules don’t apply to existing orders. The current (pre-Act) rules continue to apply to already-existing spousal support orders, as well as orders that are executed before 2019 (unless or until those orders are modified later, in or after 2019).
The good news is, that if you or your ex-spouse are currently paying alimony on a tax-deductible basis, those payments will continue to be tax deductible and won’t need to be changed. The new law grandfathers the alimony tax deduction for all alimony paid under a pre-2019 divorce instrument. However, any future modifications to alimony paid under a pre-2019 divorce instrument require specific conditions to be met for the payments to remain tax deductible.
3. Modifications to Existing Orders may or may not affect tax-deductible status
The experts currently disagree on the affect of the new tax law on this issue , but it may be necessary for certain legal conditions to be included in any new order to ensure that the payor continues to be able to fully deduct the support paid. It will be best to utilize the services of an attorney if this is your situation.
4. A Case for Simplicity – In all New Orders, Future Spousal Support Payments will be Tax Free to the Recipient
In all orders made after January 1, 2019, spousal support payments will no longer tax deductible for the paying spouse and will not need to be reported as income by the receiving spouse. The TCJA eliminated the tax deduction for alimony payments, upending longstanding law that considered it income to the recipient. Now, it will simply remain income to the party who earned it; i.e., it will remain the payor spouse’s income to report as his or her income (with no income shifting mechanism at all).
The new tax law achieves a desirable simplicity when it comes to the support provisions of an agreement or court order. Those provisions can now be very straightforward and the financial impact on each party will be crystal clear. Neither alimony nor child support payments will have any tax consequences to either party – the financial situation of each party after making or receiving the support payments will be easily discernable. And there will be no need to comply with complicated rules to ensure the desired tax treatment or to ensure compliance (since in some situations the payor spouse could lose rights to deduct it, if certain provisions were not met).
Under the old tax code, the parties received tax relief through divorce because the higher-paid earner (typically, with the bigger tax bill), was allowed to transfer his or her income to the lower-paid spouse (who often has a less burdensome tax rate), which in turn resulted in him or her being charged with having more “net” income and therefore having more ability to pay a higher amount in support to the lower earner (what the parties were saving in taxes, was divided between them – and now that benefit will simple cease to exist, making it somewhat harder to transition out of marriage where one party has significantly less income than the other spouse.)
5. Need for Legal Representation?
It may be crucial in your situation that spousal support orders are made before the end of 2018 if you have a lot to gain from the preexisting income-shifting benefits. Likewise, if you anticipate wanting to modify a current order that is currently getting this income-shifting treatment, you will want to review that in time to do it before 2019. An attorney can help to ensure that any new orders (on pre-2019 cases) meet to the legal requirements to continue being tax deductible. At this stage, legal representation can help ensure the tax status you desire.
There are also ways to minimize the tax impact effects of this new law. You may wish to work with an attorney or tax expert to explore other options.
Additionally, if you signed a prenuptial agreement in the past based on the assumption that any alimony would be deductible, you might seek to have the agreement modified.
As discussed, this may cause everyone involved to incur significant amounts of attorneys’ fees just to mitigate the effects of the new law. This is a very steep price to pay for the residents of California already suffering the effects of a costly divorce. However, the tax consequences may be impactful enough to justify the expense.
6. Take Action Immediately
If you feel this new tax law will have a substantial impact on your divorce proceedings, please plan to act immediately.
2018 is nearly over, and divorcing couples and family law practitioners now have just a little more time to finalize divorce and separation agreements and utilize the tax advantages available under the existing law. While there will be further clarifications on how exactly the new law will be implemented, it is sure to be a game changer for how divorce and separation agreements are structured in the future.