Is Spousal Support Tax Deductible?
In California, you can deduct the spousal support you paid your spouse on your state taxes. Your spouse must pay taxes on the alimony received on state taxes. But what about Federal taxes? Be very cautious with this next step.
In 2018, legislation called the Tax Cuts and Jobs Act (TCJA) went into effect (and really affected divorcing couples starting in 2019).
Prior to 2019, if a person paid spousal support to their former spouse, he or she could deduct that amount from their income before paying taxes to the federal government. The supported spouse paid federal taxes on the alimony they received, at a lower tax bracket.
This all changed for divorces that were finalized after 2018. From that point, a person paying spousal support could no longer deduct the amount they pay in spousal support. Moreover, the spouse receiving spousal support no longer has to pay federal taxes on the spousal support they receive.
In conclusion, if you pay spousal support (alimony) and your divorce was finalize after 2018, you cannot deduct the spousal support you pay on your federal taxes. You can, however, deduct it on your state taxes. If you receive alimony, you do not pay federal taxes on the spousal support you receive but you do pay taxes on your California tax returns.
Who Benefits from the 2018 Change in Federal Alimony Deductibility?
Unfortunately, the change in federal tax law often leaves both the payor and the payee with less after-tax dollars. This is because the spousal support amount is taxed at the payor’s marginal and highest tax bracket. Therefore, there is less income available for spousal support.
For recipients of spousal support, it is crucial to withhold some of the money you receive to cover your future tax obligations. If you receive $5,000 per month in spousal support, pretend that you’ve only received $4,000 and put the rest in a savings account for future taxes. For a more accurate prediction of your tax obligations, consult a Marin County Family Law attorney and CPA.
For spouses that pay spousal support, the change in the federal tax law could result in difficulty paying previous living expenses. Since you will not be deducting the support from your federal tax return, you may wish to consider changing your withholding allowances on your paycheck to withhold fewer taxes. This will provide you with more discretionary net spendable income on a regular monthly basis. Before you do so, it is recommended that you speak with a Marin County Family law attorney and CPA for better evaluation and advise.
The California Franchise Tax Board and IRS.gov have free resources to better understand the tax law. If you are thinking about or going through a divorce, however, you may want to consult with a professional.
Divorcing couples can also use tax planning strategies to decrease their tax liability. Warren Major LLP recommends that you consult with a tax account and Marin County divorce attorney. There are ways for couples can maximize their after tax incomes, even without the former alimony deduction.
Child Support and Taxes
In general, payments of child support are not considered income to the recipient nor are they tax deductible to the payor of child support. However, it is very important that your court orders specify that the payments are deemed or designated as “child support.” If the order is silent as to the type of support the payments are, it is possible that the payments may not be considered child support for tax purposes. These rules regarding child support are distinct from a Child and Dependent Care Credit which you may still be able to claim on your federal income tax return.
Family Support and Taxes
Most divorcing parties are familiar with the terms “child support” and “spousal support”, or “alimony”. A more unusal type of support is Family support, which can be ordered only pursuant to a mutual agreement of the parties. Family support combines child and spousal support without any distinction. This agreement is often made for tax considerations, described more below.
Divorcing parties can elect for family support to be treated as 100% taxable and deductible or as 100% non-taxable and non-deductible. Family support may have significant downsides for both parties, especially if either party does not consult an attorney and CPA for tax specific advise. If parties enter into a family support order, the order must be very clear as to how you and your ex treat support amounts for tax purposes, and the financial implications for both parties.
Again, family support is only a possibility if both spouses agree. If, at any point, one person decides they do not want the family support arrangement, support may be adjusted to a more traditional child and spousal support arrangement.
Contact a Marin County Family Law Attorney
There are many reasons for divorcing couples to be strategic about how they divide their assets. One of those reasons is to be able to minimize their tax liability, whether or not alimony is paid.
If you are considering divorce, please contact my office for a consultation. As a Marin County family law attorney, I work with many couples, often in consultation with a CPA, to maximize positive financial gain in conjunction with the tax laws.
Attorney Marissa Major is a Marin County CA is family law attorney, specializing in divorce, child custody and support, marital contracts and other family law issues.
Disclaimer: Warren Major LLP’s blog articles on its website for informational purposes only. The information contained herein may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Warren Major LLP or the individual author. This general information is not a substitute for legal advice on any subject matter. For advice pertaining to your specific case, please contact our office to schedule a consultation. No reader of this article should act or refrain from acting on the basis of any information included in, or accessible through, this article without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction. Using this information or sending electronic mail to Warren Major LLP or its attorneys does not create an attorney-client relationship. Any statements pertaining to past results do not guarantee future results.