For almost 80 years tax law appeared to be on a divorced couple’s side allowing spousal support payments from one ex-spouse to the other to be deductible by the paying spouse and considered taxable income to the receiving spouse. Spousal support deductions allowed the paying spouse to reduce the amount he/she had to pay in taxes. Divorce settlements took this into consideration, and it typically led to a higher spousal support payment agreement. A recent change to this law has shifted things considerably.
Depending on what you know about tax law, you may think that spousal support payments are still tax deductible, meaning the paying spouse could deduct those payments from their state and federal taxes, according to the law. Today, we discuss how tax law has changed in California and what you need to know about paying taxes on spousal support.
Taxation & Spousal Support in California
Recently, the Tax Cuts and Jobs Act (TCJA) got rid of federal income tax deduction. What this means is that a paying spouse no longer can deduct spousal support payments from their taxes and the receiving spouse no longer must pay taxes on spousal support. However, the TCJA did not get rid of state law deductions in California, meaning paying spouses can deduct spousal support from their state income taxes. To do so, the paying spouse must meet the following criteria:
- Make a payment in the form of cash, check, or a money order
- Live separately from the ex-spouse when making a payment
- Ensure the spousal support payment is not actually a child support payment
- Your responsibility to make payments terminates upon the death of either spouse
- Your divorce or separation paperwork does not identify spousal payments as not alimony
Unlike federal income taxes, California tax code considered spousal support taxable, so the receiving spouse will have to report these payments as income.
What Are the Tax Implications?
Under this law, there is a tax burden on the spouse paying for spousal support. As the paying spouse benefited beforehand with tax deductions, it could potentially lead to reduced spousal support payments or complications during the divorce process. Spousal support payers will likely want to pay less than they would before when they could deduct the payments.
Are There Any Exceptions to This New Law?
Yes, if you signed an agreement of separation or divorce before December 31st, 2018, you will not be affected by this new tax rule. However, if you signed this agreement before the end of 2018 and the spousal support order is modified before the start of 2019, the new tax rule will remain in effect. The only exception would be if you included a clause in your agreement stating otherwise.
Resources for Understanding State Tax Law
The tax laws in California do not make for fun and easy to read material. If you require additional assistance regarding spousal support and tax code implications, you will want to consult with an experienced attorney. For additional reading, you can take a look at the California Franchise Tax Board for free resources.
Consult with a Reputable Attorney from Our Firm
The recent tax implications affect spouses who pay spousal support across California. If you need assistance determining how much support you may need to pay or calculating what is fair to your ex-spouse, contact our firm today.
Contact our firm online or reach out via (949) 577-7935 to learn more about our family law services.