Question: My wife and I divorced a couple of years ago, and I pay alimony. I recently heard that under the new tax plan, alimony will no longer be tax-deductible. Will I be able to reduce the amount of support that I pay if it’s no longer deductible? Do you know why the law was changed?
Answer: Alimony, known as spousal support in California, is the payment of money from one spouse to another pursuant to a divorce judgment or other court order. Since 1942, federal law has allowed the party paying spousal support to deduct the payment of support from one’s income and required that the recipient pay income tax on it. But that all changed under the recent tax law, the Tax Cuts and Jobs Act of 2017.
You, however, will not see any changes. As someone who is paying support under a divorce judgment entered prior to December 31, 2018, you will be “grandfathered in” under the previous rule. Consider it the Donald-Ivana exception. You will continue to deduct spousal support from your gross income as you have done. Even if your court order is modified, you will continue to be treated under the prior rules. But for anyone whose divorce judgment is entered in 2019 or later, there will be no such tax treatment.
Since the new law will not affect your payment of taxes, this alone will not be a reason to change your court-ordered support. But how the new tax law will change the award of spousal support for others remains to be seen.
In making an order for spousal support, the court considers, among many factors, the ability of the supporting spouse to pay. The analysis of the ability to pay looks at the supporting party’s tax obligations and the result on net income. So a key consideration here is whether the support payment is taxable or tax-deductible. If the supporting party is having to cover the entire tax burden, the supporting party will have less money available to pay support.
Some experts opine that a recipient’s support award could be reduced by 10 to 15 percent. So the supporting party pays higher taxes, and the supported party has less in actual spousal support. Both parties lose; the real winner here is the government.
Answering your question about why the law changed runs the risk of taking this column from the business page to the editorial page. But there are arguments on both sides.
Proponents of doing away with the tax deduction cited the fact that in 2015, the Treasury lost approximately $950 million on the deduction. The most common form of lost revenue was the payor deducting the payment of support and the payee not paying income taxes on the amount received. Congress’ Ways and Means Committee, the committee in charge of writing the bills to raise revenue, supported the change to the law by calling the deductibility of spousal support a “divorce subsidy.”
Opponents of the change in the law note that for 75 years the laws have acknowledged that divorce is a time of great financial strain and that the deductibility of support allowed for the recipient to keep money that would otherwise go to the government. Critics have also noted that the new legislation appears to be aimed directly at women, who under the most recent Census data make up over 98 percent of all spousal support recipients.
Regardless of which side one takes, one thing is abundantly clear: If spousal support is an issue, it will be in the best interest of both parties currently undergoing a divorce to get into court and obtain the judgment prior to the end of the year so as to take advantage of the prior law.
Preston Morgan is a partner at Kopper, Morgan & Dietrich, a Davis law firm providing family law, estate planning and trust litigation representation. His column is published every other week in the Davis Enterprise. To pose a question to Preston Morgan, contact him at https://kopperlaw.com.
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