Effective January 1, 2019, alimony will no longer be tax deductible for the paying spouse and the recipient spouse will no longer be taxed on it. This new law will undoubtedly affect alimony negotiations in cases that were started after the new law took effect. Previously spousal support was tax deductible to the paying spouse and counted as taxable income for the recipient spouse, but as of January 1st, that is changed.
The Old Alimony Law
Under the previous federal tax law any amount paid to a spouse or a former spouse under a divorce or separation instrument may be alimony for federal tax purposes. The old law covered a divorce decree, a separate maintenance decree, or a written separation agreement. Under those circumstances, alimony was deductible by the payer spouse. Additionally, the recipient spouse had to include it in income. This might cause confusion for individuals who started legal proceeding right before the end of the year. A California divorce attorney can explain the new law in more detail and how it might affect your alimony payments in the future.
The New Alimony Tax Law
The Tax Cuts and Jobs Act (TCJA), will remove a 75-year-old tax deduction for spousal support payments. As a result of a tax overhaul, this new law takes effect January 1, 2019. It does not affect anyone who signs a divorce agreement before December 31, 2018. So, what does this mean? If you are contemplating divorce and you enter into an agreement on or after January 1, 2019, the spouse who pays spousal support will not be able to deduct the payments on their taxes, and the spouse who receives it won’t be paying any income taxes on it.
How Does it Affect Unsettled Cases?
If you entered into a separation or divorce agreement before December 31, 2018, would the paying spouse lose the tax deduction? In most cases, the answer is no. The pre-2019 tax rules would still apply if a separation or divorce agreement signed before December 31, 2018 and the spousal support order is modified in 2019 or later. The exception would be if the agreement used specific language stating otherwise.
So, if you want to take advantage of the current tax laws, you would want to ensure that you were locked into an agreement before the end of 2018. If you do not specify that the 2019 laws will apply if you modify your agreement after January 1st, it will remain unchanged.
Of course, for payments to a spouse to be tax deductible according to the pre-2019 standards, they must qualify as spousal support or alimony. A spousal support attorney can answer additional questions that apply in your circumstances.
How Does it Affect New Cases?
Some divorce attorneys feel that the tax change might make divorce negotiations more challenging. This may be especially true for affluent individuals who benefit the most from the previous tax deduction rule. This new tax rule might lead to smaller spousal support payments being negotiated because they will be losing the tax advantage.
Can Child Support Payments Offset the Changes?
Child support payments are not tax deductible. Additionally, it is not counted as taxable income by the receiving party. Since child support is never deductible, there is no way for a spouse to up their child support payments to elicit a tax advantage that does not exist. Speak with a family law attorney about other tax credit options that may be available.
Final note: A legal consultation is recommended if you have any questions on how this new law will affect your future alimony payments. A local family law attorney can also help you negotiate your divorce so that alimony payments are fair relative to the effects of the new law.