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New Spousal Support Tax Changes Affect Payors and Payees

May 01, 2018

The Tax Cuts and Jobs Act (the “Act”) became law on December 22, 2017 and influences many areas of American life. Anyone who is contemplating divorce should understand how the Act treats spousal support payors and payees. 

For years, the tax code permitted the payor spouse to deduct his or her spousal support from the payor’s taxes.  The payee spouse was required to include the support payment in his or her income.  From a practical perspective, this provision would influence individuals and attorneys when analyzing spousal support.  During settlement negotiations this provision provided an incentive to the payor spouse to possibly be more amenable to agreeing to a spousal support provision knowing that he or she could deduct that amount form his or her income.  In many cases, this deduction could provide relief to the payor spouse in the form of a lower tax liability. 

The Tax Cuts and Jobs Act eliminated the tax incentive. No longer will the payor spouse be able to deduct his or her spousal support payments nor will the payee spouse be required to include the payments as income for tax purposes.  However, the Act did include a grace period.   It does not become effective until December 31, 2018.  While there is a deadline, previously entered orders and executed separation or other stipulation agreements don’t turn into pumpkins at midnight on January 1, 2019.  Previously entered orders and agreements are grandfathered and will still be able to take advantage of the tax incentive so long as they stay unmodified.  Parties who enter agreements or have orders entered after the deadline will no longer be able to take advantage of the tax incentive.

The change presents a significant shift in the way family law practitioners advise clients and address spousal support in negotiations.  The repeal’s impact is already being felt by attorneys and clients in handling divorces where spousal support is an issue.  As this is a new development, it is imperative that family law attorneys educate clients about how the Act will impact them.

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