Divorce Planning: How Tax Reform Could Affect Your Decisions
Under the current tax law, individuals making spousal support payments may deduct the payments on their tax returns. Conversely, the individual receiving alimony must count those payments in his or her gross income.
These rules provide a financial benefit for both parties during an otherwise difficult time. Spousal support payors could agree to higher alimony payments knowing the deductions help reduce taxable income. Recipients therefore, generally receive more spousal support, and are generally taxed on the income at a lower rate.
These benefits go away as of January 1, 2019 under the latest version of H.R.1 Tax Cuts and Jobs Act (H.R.1).
So what does tax reform mean for couples who are already divorced, expect to finalize a dissolution next year, or may separate and divorce later? If the President signs the current version of H.R.1:
- Individuals paying spousal support pursuant to a court order executed before December 31, 2018 will continue to deduct those payments; individuals receiving spousal support will continue to count the alimony as income – so long as there are no changes.
- Couples who finalize divorces or separation agreements in 2018 will follow the above-rules.
- Divorced couples seeking modifications to their dissolution or separation agreements should consider doing so in 2018 if the alimony payment deduction is of importance.
- Couples with a pending divorce should consider settling the alimony question in 2018 to take advantage of the deduction.
- Tax reform will also impact child support, as family law courts base the amounts paid here on combined income of both parents – changes to the tax rates, and standard or itemized deductions will impact the calculations.
For more information, see Section 11051. Repeal of the Deduction for Alimony Payments.
Vanessa Soto Nellis is the Chair of our Family Law Practice Group.