Prior to December 31, 2018, in most divorce situations, one spouse is legally obligated to make payments to the other party. These payments could be substantial and tax deductions and for some payors, this has been a substantial benefit. However, the Tax Cuts and Jobs Act (TCJA) will “scrap” a 75-year old deduction for spousal support payments.
Prior to January 1, 2019, spousal support was deductible to the paying spouse and taxable income for the recipient spouse. The new law will not affect judgments or stipulated agreements before January 1, 2019. For individuals who must pay spousal support, this change can be expensive—because the tax savings from being able to deduct such payments can be substantial
The tax change may also make divorce negotiations more difficult, especially for wealthy individuals who benefitted most from the pre-2019 tax deductions. The tax deduction has been an excellent bargaining tool, but now wealthy spouses are likely to negotiate smaller spousal support payments because they will be losing the tax advantage.
If you entered into a divorce agreement prior to the new law taking into effect, nothing changes.But keep in mind that for payments to a spouse to be deductible, they must qualify as spousal support or alimony. The following are required: spouses do not file a joint tax return, payments consists of cash, check or money order, payment is made under a legal separation or divorce agreement, the agreement does not state that the payment is not spousal support, spouses do not live in the same home when the payments are made, the paying spouse is not obligated to make the payment after the receiving spouse dies, and the money paid is not treated as a part of a the property settlement, nor is it child support.
Keep in mind, child support is not tax deductible nor is it counted as taxable income by the receiving party. If you are currently in divorce proceedings and will be paying your ex-spouse, you will not be able to deduct those payments. The recipient will also no longer be reporting the spousal support he/she receives as income. In terms of tax benefits, this is clearly a windfall to the recipient and a financial loss to the payor.
Please call my office at 310-601-7144 or email me at [email protected] if you have any questions or you want a consultation.