How the Tax Cuts and Jobs Act Affects California Support Orders
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. This tax overhaul contains a change with huge implications to issues California family law. Specifically, Section 11051 of the Act repeals the federal deduction for spousal support payments pursuant to any divorce or separation instrument executed after December 31, 2018.[i] Correspondingly, support payments received do not constitute taxable income.
Generally, this means less cash will be available to support families going through a divorce. Prior to the Act, spousal support payments were deductible to the payor and treated as taxable income to the payee. This usually meant that more cash was available to the family as the payor would most likely be in a higher tax bracket. Accordingly, many couples raced to execute support orders by the end of last year.
That said, confusing issues can still arise. For example, while consensus appears to exist that temporary support payments paid in 2018 are deductible while temporary support payments paid in 2019 are not, some ambiguity does remain in regard to permanent orders signed by the parties prior to the 2018 cutoff but entered by the Court afterwards. The language of the Act appears to indicate that it is the date of entry that matters, although it is unclear.
Section 1105(c) of the Act provides: “The amendments made by this section shall apply to- (1) any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act[ii]) executed after December 31, 2018, and (2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.”
This does at least make clear the consequence of a modification of a spousal support order. If a spousal support modification is made after December 31, 2018, deductibility will only be lost if the modification expressly provides that the amendments made by the tax law apply to the modification. That said, to play it safe, parties may want to include express language in their modification re intending to maintain deducibility should that be their desire.
Because the Act is brand new, family law practitioners have not had a chance to see how its effects play out. However, if you are just filing for divorce now, know that spousal support payments pursuant to any divorce or separation instrument you execute in your matter will not be federally deductible as they had been before January 1, 2019.
These federal changes of course do not affect California taxes, for which spousal support is still deductible for the payor and treated as taxable income to the payee. For purposes of state taxes, California law requires spousal support payments to be reported as income by the recipient. The spouse who pays spousal support may take a deduction for these payments if all of the following requirements are met:
- The payor pays in cash, checks or money orders.
- The divorce or separation instrument does not say that the payment is NOT alimony.
- The parties are not members of the same household when making the payments.
- The payor has no liability to make any payment after the death of the spouse/former spouse.
- The payment is not treated as child support.[iii]
Accordingly, if you are in pro per and wrangling with a DissoMaster or similar program for the first time, pay attention to the settings. The DissoMaster program contains a section where federal and state tax settings can be changed. The federal tax setting should note support as nondeductible and nontaxable, while the California tax setting should note support as deductible and taxable. In most cases, it is best to seek the advice of an attorney and/or CPA—especially if you have any doubts.
[i] The Act made many other changes as well; review the Act in full (https://www.congress.gov/bill/115th-congress/house-bill/1/text) or consult with a CPA to learn how other changes may affect you and your family. The IRS also provides information about the reform for taxpayers here: https://www.irs.gov/tax-reform.
[ii] An instrument is defined as follows: (2) The term “divorce or separation instrument” means— (A) a decree of divorce or separate maintenance or a written instrument incident to such a decree, (B) a written separation agreement, or (C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.