Spousal Support (aka Alimony) and our recent Federal tax laws
Dear Clients and Friends,
The comprehensive tax law titled: TAX CUTS AND JOBS ACT OF 2017 (TCJA) was passed by Congress and signed into law by the President in January of 2018.
In the world of Family Law, spousal support - aka alimony - is the new provision of highest interest. It holds that spousal support will no longer be, under our federal tax system, tax deductible to the payor or taxable to the recipient as it has been for ages. However, California judges even in 2018 had to consider it when they made permanent spousal support orders This is so because Family Law Code section 4320 requires a court to consider, among other things, “[t]he immediate and specific tax consequences to each party”.
Previously courts could comply with this requirement by merely indicating that “spousal support is deductible to the payor and taxable to the recipient”. Now, under TCJA paying spousal support is like paying child support, or any usual debt, for purposes of tax effects with all such payments 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 former deduction at tax time would effectively reduce his bottom line cost on each of those payments to $2,000 per month.
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 says 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 got divorced in 2018 or earlier) 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 spousal support 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.
We invite each of you seeing this newsletter to take advantage of our free initial phone evaluation on any, of your family law concerns.