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Posted on November 20, 2018 in Taxes
Effective January 1, 2019, Section 11051 of the Tax Cuts and Jobs Act repeals the tax code section that formerly allowed the payor of spousal support to deduct the same amount (dollar for dollar) from their income when reporting taxable income. The deductibility of spousal support has historically been a significant tax benefit to payors, easing the financial impact of paying support to a former spouse.
Subsection (c) of Section 11051 makes the amendments applicable to: 1) divorce or separation instruments after December 31, 2018, and 2.) any divorce or separation instrument executed on or before such date and modified after such date if the modification expressly provides that these amendments (removing the deductibility) specifically apply.
So, in order to ensure a spousal support order is deductible, someone contemplating divorce would need to have a judgment on spousal support entered before the end of 2018. Judgments that are entered before the end of 2018 may be modified at a later date and remain grandfathered into the deductibility rules of pre-2019 judgments.
If a judgment on spousal support is entered in 2019 or later, the spousal support order will fall under 2019 rules, i.e., non-deductible to payor and not-includable as income to the recipient. It doesn’t appear that there is any room under the new law that will allow tax-deductibility of spousal support, even if the parties agree to it.
Rather, when calculating spousal support under Family Code section 4320, California judges and the parties involved will need to take into account the tax impact under the new tax law. The tax impact created by the new tax bill results, in most cases, less net income available to the parties across the board because the tax is being assessed on the higher tax bracket individual (the payor) rather than on the lower income tax bracket individual (the recipient).