Prior to the passage of the 2017 Tax Cuts and Jobs Act, spousal support payments made under a divorce or separation agreement could qualify as a federal tax deduction. However, spouses who execute a divorce or separation agreement after December 31, 2018, will no longer qualify for those same tax deductions. This means the party paying spousal support will no longer be able to deduct those payments on his/her federal income tax returns and the party receiving spousal support will no longer declare the payments on his/her federal income tax returns. This does not apply to spousal support orders and agreements executed on or before December 31, 2018. Additionally, this does not apply to California state income tax returns, which at this writing have not been modified to the new federal tax code.
How will the new law impact spousal support? It is likely that the person paying spousal support will pay less (because they will lose the tax deduction) and the person receiving spousal support will receive less (because it will be non-taxable). The problem results in a lack of creative tax planning because under the old law the parties were free to negotiate spousal support to determine how each could benefit the most from the payor’s ability to deduct the payments and the payee’s ability to obtain as many tax deductions and tax credits possible to offset the taxable spousal support they would receive. Gone also is the hybrid known as Family Support, which bundled child support and spousal support to a higher combined level and made the entire payment tax deductible to the payor and taxable to the payee. Further, the new tax bill reduced the federal dependency deduction for minor children to zero for years 2018 through 2025 but does not reduce the child tax credit.
Without these considerations or the ability to negotiate payments for tax considerations, crafting the ideal support agreement for all parties is more important than ever. If you need help with spousal or child support contact The Reape-Rickett Law Firm at 888-851-1611.