Beginning on January 1, 2019, changes to the federal rules on spousal support drastically changed the tax implications for alimony payments. With certain exceptions, as of 2020, spousal support no longer is deductible from federal income taxes for the paying spouse and the recipient of spousal support will not have to report it. This has massive implications on new divorce, existing alimony payments, and modifications to alimony going forward in California.
Existing Spousal Support Law
Under the current law, one of the factors that a California judge must consider is “the immediate and specific tax consequences to each party.” The spouse that is ordered to pay alimony is allowed to deduct that amount from federal income taxes. The spouse that receives spousal support must claim that amount on his or her federal income taxes. Under the Pre January 1, 2019 system, the spouse ordered to pay alimony had a tax incentive to agree to spousal support payments. That has changed.
New Spousal Support Law
According to the Tax Cuts and Jobs Act (TCJA), the deduction for payment of spousal support was eliminated for federal income taxes. This law went into effect on January 1, 2019 and affected all new divorce agreements from that moment on. This change in the tax code has had a significant impact on high net worth divorce cases the most because the paying spouse will no longer be able to deduct that amount from his or her taxes. However, it has potential positive implications for the recipients of alimony, who are no longer required to claim it on their federal income tax statements.
If you or your former spouse wishes to modify an existing alimony agreement after January 1, 2019, the pre-2019 tax rules will still apply to your spousal support payments. The only exception to this rule is if specific language in the modification states that the changes will adopt the new tax rules for 2019. However, any modifications to spousal support for a divorce agreement signed after the new year will apply the 2019 tax changes.
Implications of the Changes in Spousal Support
Beyond affecting high net worth divorce cases more significantly, the changes in the spousal support laws provide an incentive for the spouse who will be paying alimony to negotiate for lower payments in exchange for a higher percentage of assets or other incentives to offset the lack of tax benefits. This has the potential to greatly affect the overall financial stability of the spouse receiving alimony if the payments are considerably smaller than what they would have been pre-2019. An experienced family law attorney will be able to review the facts of your case and help guide your divorce negotiations to ensure that you receive the full split of marital benefits you deserve.
Contact My Office Now
If you have more questions about how changes in the spousal support law may affect your divorce or alimony payments, my office is able to help. Call or contact the Law Office of Bradley S. Sandler in Los Angeles today to speak with an experienced family law attorney about your legal needs.