Is Spousal Support Tax Deductible?
Seeing how we are now in the middle of tax season, millions of Americans will look through their expenses to see what tax deductions they have available to them to lower their tax burden. For people paying spousal support by court order or judgment before January 1, 2019, those payments were previously tax-deductible to the payor and considered income for the recipient. However, this changed with the Tax Cuts and Jobs Act of 2017.
Effective for all orders made on or after January 1, 2019. Under the Tax Cuts and Jobs Act, spousal support is no longer tax deductible for the person who is paying the support. The person receiving the support is also no longer required to report this money as taxable income. The Tax Cuts and Jobs Act changed who has the burden of paying the tax on spousal support. The responsibility has been moved from the payee to the payor. The payor of support now essentially loses a major benefit associated previously with spousal support payments. I.e., the reduction of their gross income for income tax purposes. This consequently has changed how some attorneys negotiate spousal support orders, as the non-deductibility of spousal support payments often will limit the amount of support that can be offered.
It is very important to note that this new law does not affect any agreements finalized before January 1, 2019, and each State has different tax laws for spousal support. California still allows tax deductibility for the payor and tax inclusion for the payee of spousal support on State taxes. All previous orders prior to January 1, 2019, are grandfathered in, so if you have been taking the tax deduction, you will still be able to take that deduction, and the person receiving payment will still have to claim that money as taxable income. As explained below, a modification of support will be considered a new support order and will most likely need to follow the new tax laws.
If, after all this time, you are still guided by a divorce agreement signed before January 1, 2019, you are grandfathered into the old rules. So if you have been claiming spousal support as tax deductible, you may still do so. However, if either spouse requests a modification, and the new agreement says it is subject to the rules of the TCJA, those spousal support payments will no longer be tax deductible, and the payee will no longer have to claim those payments as taxable income.
This was a significant change to rules that had been in place for a very long time, and even now, for couples seeking a divorce, this new rule still comes as a surprise, especially if they had received information from family or friends based on their experiences before the new rules went into effect.
While many provisions of the TCJA will expire in 2025, this part of the tax code is permanent.
It has been several years since this provision has taken effect, but it is still important to let people know of these relatively new rules. Getting a divorce can be an expensive proposition. Since people who pay spousal support no longer get tax benefits, divorce has become even more costly. Of course, most people aren’t going to stay together because getting a divorce is too expensive. Still, people contemplating divorce should be aware of the entirety of the expenses they will potentially incur.