The Tax Cut and Jobs Act passed in December 2017 is changing the tax rules around spousal support.
Currently, if you pay spousal support, it is an “above the line” tax deduction. Meaning the total amount of the spousal support payment comes right off the top of your income and you don’t pay taxes on it. For example, if you make $100,000 per year and pay $10,000 per year in spousal support, you only pay taxes on $90,000 of income.
If you are the recipient of the $10,000 per year in spousal support, you pay taxes on the spousal support.
This has been a benefit to many families as the higher earner would have paid more in taxes on the $10,000 than the lower earner who is receiving the spousal support. This has generally resulted in a tax savings to the family as the lower earner is often in a lower tax bracket. This keeps more money in the family and sends less to Uncle Sam.
As of January 1, 2019, the spousal support paid will no longer be a tax deduction for the person who pays it. It will not be taxable to the person who receives it. This only applies to couples who are divorced or legally separated after January 1, 2019. If you are already divorced, nothing changes. If you finish your divorce on or before December 31, 2018, then the spousal support is still deductible to the payor.
Generally, this will mean that the payor of spousal support will pay more taxes overall, thus reducing the amount of after tax income available for support. Therefore the amount of child and spousal support paid will likely be lower. However, the person receiving the support will pay no taxes on the spousal support, so they no longer have to worry about setting money aside for taxes.
FYI – child support has never been a tax deduction for the payor and has not been taxable to the recipient, so this is not changing.
What to do? If you are a family that would benefit from tax deductible support, then consider speaking to a divorce attorney right away to see how you can take advantage of the current tax laws.
What if I want to change my spousal support order after January 1, 2019? If your original spousal support order, subject to a judgment or decree of separation or divorce, was made prior to December 31, 2018, and you need to modify it later, you are grand-fathered in under the old tax laws. However, you can choose to opt out of the old tax laws if you both agree.
Shawn D. Skillin, APC
Providing Personalized Divorce Transition
on behalf of:
Collaborative Family Law Group of San Diego