Alimony (aka Spousal support) and our new Federal tax laws
Dear clients and friends,
As many of you know, a comprehensive tax law was just passed by Congress and signed into law by the President. In the world of Family Law, alimony – known also as spousal support – is the change of highest interest. Spousal support will no longer be, under our federal tax system, tax deductible to the payor or taxable to the recipient.
Note, that this part of the new tax law does not go into effect until January 1, 2019. However, California judges will have to consider it when they order spousal support in any particular case. This is because Family Code section 4320 requires a court to consider, among other things, “[t]he immediate and specific tax consequences to each party”. Up until now courts could comply with this requirement by merely indicating that “spousal support is deductible to the payor and taxable to the recipient”. Now, the immediate tax consequence may be no consequence. Paying spousal support will be like paying child support, or any usual debt, for purposes of tax effects, with all of these expenses being non-deductible to the payor.
For example: If an ex-husband is paying $3,000 in monthly alimony and is taxed at 33 percent, the deduction at tax time reduces each of those payments to $2,000.
Now, if the ex-wife is in the 15 percent bracket the $3,000 she receives is reduced by $450, which goes to taxes, and leaves her with $2,550. Under the new tax law and providing that the ex-wife receives the same level of support it will cost the ex-husband $2,550 instead of $2,000.
As regards modifications of existing spousal support orders: The new law appears to say that modifications after 2019 will not affect decrees entered into before 2019 unless the parties use language in any agreed modification to say that the new law is going to apply. That means that a payor who is already divorced (or gets divorced in 2018) and who is able to deduct spousal support will not be able to successfully argue for a new order lowering or eliminating spousal support on the basis of taxes. To that person spousal support has always been tax deductible and always will be. Of course, as with any case, there may be other reasons, unrelated to taxes, to ask a court to lower spousal support.
This same logic applies to alimony recipients. For them (“them” means people divorced before 2019), spousal support has always been taxable income. So they cannot complain, with success, that spousal support should increase because the new law will not apply to them. And here as well – there may be other reasons to have an increase in spousal support.
As you might guess we all are still figuring this one out, so stay tuned and do take advantage of our free initial phone evaluation of any, and all, of your family law concerns.