The Tax Cuts and Jobs Acts Eliminates the Tax Deduction for Spousal Support Beginning January 1, 2019
By Sanford Millar of MillarLaw A Professional Corporation On Monday, November 5, 2018
The Tax Cuts and Jobs Acts Eliminates the Tax Deduction for Spousal Support Beginning January 1, 2019, except for support Orders effective by December 31, 2018.
For decades the Internal Revenue Code and the California Revenue and Taxation Code have allowed an income tax deduction to payors of “Spousal Support”. The recipient ex-spouse was required to report the support payment as taxable income. These rules no longer apply for federal purposes beginning January 1, 2019. The Tax Cuts and Jobs Act severely limits the use of itemized deduction in exchange for a higher Standard Deduction. The result is that divorcing couples will be faced with non-deductible spousal support payments and income that is treated like child support, meaning non-taxable for federal purposes.
The new rule stake effect January 1, 2019 but the old rules are grandfathered for cases where there was a court Order that determined the amount of support entered by December 31, 2018. The net effect of the new law is to make spousal support marginally more expensive to pay with marginally less net income to the recipient based upon taxes to be paid and income to be reported.
The following originally reported by CBS MartketWatch summarizes the criteria for deductibility of Spousal Support payments:
“For a particular payment required by a pre-2019 divorce agreement to qualify as deductible alimony, all the following requirements must be met.
1. Written Instrument Requirement
The payment must be made pursuant to a written divorce or separation instrument. This term includes divorce decrees, separate maintenance decrees, and separation instruments.
2. Payment Must Be to or on Behalf of Spouse or Ex-Spouse
To qualify as deductible alimony, a payment must be to or on behalf of a spouse or ex-spouse. Payments to third parties, such as attorneys and mortgage lenders, are permitted if they are made on behalf of a spouse or ex-spouse and pursuant to a divorce or separation agreement or at the written request of the spouse or ex-spouse.
3. Payment Cannot Be Stated to Not Be Alimony
The divorce or separation instrument cannot state that the payment in question is not alimony or effectively stipulate that it is not alimony because it is not deductible by the payer or not includable in the payee’s gross income.
4. Ex-Spouses Cannot Live in Same Household or File Jointly
After divorce or legal separation has occurred, the ex-spouses cannot live in the same household or file a joint return for payments to qualify as deductible alimony.
5. Cash or Cash Equivalent Requirement
To be deductible alimony, a payment must be made in cash or cash equivalent.
6. Cannot Be Child Support
To be deductible alimony, a payment cannot be classified as fixed or deemed child support under the alimony tax rules. The rules regarding what constitutes child support–especially what constitutes deemed child support–for this purpose are complicated and represent a nasty trap for unwary taxpayers. Contact a tax professional if your proposed divorce agreement includes payments that you intend to be alimony as well as payments that you intend to be child support.
7. Payee’s Social Security Number Requirement
For the payer to claim an alimony deduction for a payment, the payer’s return must include the payee’s Social Security number.
8. No Obligations for Payments to Continue after Recipient’s Death
The obligation to make payments (other than payments of delinquent amounts) must cease if the recipient party dies. If the divorce papers are unclear about whether or not payments must continue, applicable state law controls. If under state law, the payer must continue to make payments after the recipient’s death (to the recipient’s estate or beneficiaries), the payments cannot be deductible alimony. In other words, the payment obligation must cease if the recipient party dies in order for the payment to qualify as deductible alimony. Failing to meet this requirement for payments to cease if the recipient dies is the most common reason for lost alimony deductions.”
If tax deductibility of Spousal Support is important to you and you have a pending divorce case time is running out to act.