Spousal Support Changes under the New Federal Tax Law

The recent federal tax overhaul provides in part that, in any spousal support orders entered after December 31, 2018, the spouse paying spousal support will not be able to deduct it and the spouse receiving spousal support will not be able to claim it as income for tax purposes.  This will reverse the 75-year-old tax deduction for spousal support.

Prior law effectively subsidized increased amounts of spousal support.  Payors in higher tax brackets than recipients could pay relatively higher amounts of spousal support, take the tax deduction and thus pay meaningfully lower amounts in after-tax dollars.  Recipients in lower tax brackets would benefit from higher payments, but pay relatively low or no taxes thereon.  The Treasury has thereby subsidized a type of arbitrage, helping divorcing couples accomplish “softer financial landings” as they divide one household into two.

The Census Bureau reports that 243,000 people received spousal support last year, and that 98% of them were women.  The IRS indicates that substantially higher numbers of payors claim the existing deduction.

According to the most recent nationwide survey of the over 1,600 Fellows of the American Academy of Matrimonial Lawyers (of which I am one), the changes will make divorce a more emotionally challenging proposition.  An overwhelming 95% of responding Fellows anticipate the new tax plan will change the ways in which divorces are settled.  A clear majority of 64% believe that the cases will now become more acrimonious.

Additionally, 62% of the responding Fellows feel that the changes in the tax plan offer a greater benefit to the payee in terms of spousal support.  59% are finding that husbands are showing a greater sense of concern in regard to the repeal of the alimony deduction.

My guess is that spousal support awards in California will drop in net payments (in relation to prior tax-subsidized amounts) as the government stops the present subsidy.  Payors will likely benefit and payees will likely receive relatively less.  People divide their marriages for all sorts of reasons, but anyone anticipating a divorce that might include spousal support ought to consider the changes as 2019 approaches.