While most understand that the Tax Cuts and Jobs Act of 2017 (“the Act”) has had a major impact on tax rates and deductions, it is important to note that it will have a significant effect on separating and divorcing spouses as of January 1, 2019. The Act repealed sections of the tax code which allowed for an above the line tax deduction for the spouse paying alimony and required the alimony recipient to declare it as income on his or her tax return. Until the start of the new year, however, alimony can still be deductible to the payor and declared as income by the recipient. If an order is modified after January 1, 2019, alimony will still be deductible to the payor and included as income to payee as long as the post January 1, 2019, order or written agreement expressly states this.
Spousal support is not going away. It is fundamental to any divorce where there is a disparity of income. The elimination of the alimony deduction may have a negative financial effect though on all but those in the highest tax brackets. For example, if a receiving spouse’s net taxable income is over $41,000 per month ($500,000), including any spousal support, he or she is going to be in the same tax bracket as the payor, so the alimony tax deduction simply shifts the tax from the payor to the payee. For these high-earners, there is no benefit to the deduction. On the other hand, where there is a differential between the payor’s higher tax bracket, and the payee’s lower tax bracket, there is a tax savings and in some cases, it is significant. The software family lawyers use to determine temporary spousal support (and often permanent spousal support), showed the tax savings and in “recommending” an amount of spousal support it divided the tax savings between the parties. Many couples benefited from this savings. With this tax savings, payors of spousal support could pay more support (than if there was no deduction at all) and, consequently, there was more money available to the family than there will be after January 1, 2019, when the alimony deduction is eliminated.
The software that most family law practitioners use has the Santa Clara, Alameda, Marin, Yolo, Humboldt, or Kings County spousal support guidelines built into the system, depending on which county the case is in. The Santa Clara County guideline states as follows: “Temporary spousal or partner support is generally computed by taking 40% of the net income of the payor, minus 50% of the net income of the payee, adjusted for tax consequences. If there is child support, temporary spousal or partner support is calculated on net income not allocated to child support and/or child-related expenses. The temporary spousal support calculations apply these assumptions.” Because this formula was developed when spousal support was tax deductible, leaders in the field believe it will have to be adjusted to reduce the 40% of the payor’s income because the payor will have less net income available to pay spousal support under the new tax law. I would expect changes to be coming to local court guidelines soon. In the meantime, practitioners should be prepared to argue that the guideline no longer represents a fair allocation of the financial resources between the payor and the payee. Note that the rule in Los Angeles states that the Court may use the Santa Clara County guideline — not that it must apply the guideline.
Another aspect of alimony that will disappear as a result of the Act is recapture. Essentially, the recapture rules were enacted in order to ensure that parties to a divorce could not disguise a property settlement as alimony in order to obtain a significant tax deduction. At best, these rules were arcane and trapped many an unwary party to a divorce, not to mention the attorneys that represented them. Essentially, if the order for alimony reduced in amount (stepped-down) too much in the first three years that spousal support was paid, the deduction would be disallowed and recaptured later. No one will miss this arcane provision of the Internal Revenue Code, except the family law test examiners who loved to stump the so-called experts.
Considering that the elimination of this alimony deduction saves the U.S. Government less than $1 billion a year, according to reports, many wonder why Congress chose to terminate this provision of the tax law. Some speculate that some Republicans saw this deduction as a divorce subsidy and that it encouraged people to get a divorce. Whatever the reasons behind the change, the fact is that, because of the loss of the alimony deduction, it will now be more costly for some to live after going through a divorce. While there have never been many financial benefits to divorce, the situation now will be even worse as a result of there now being less money to support an already divided family. For these reasons, you might want to get those alimony agreements or orders finalized before December 31st.
Peter M. Walzer is the founding partner of the Southern California law firm Walzer Melcher LLP, a practice focused exclusively on family law with offices in Woodland Hills. He is President of the American Academy of Matrimonial Lawyers.