Many people aren’t aware that the 2017 Tax Cuts & Jobs Act made a big change to the federal tax treatment of spousal support. Under the law, spousal support is no longer tax deductible for the person paying it. This is effective for all agreements signed after December 31, 2018. Since spousal support has been tax deductible to the payor for 75 years, new negotiation tactics will be necessary to address the change.
Tax treatment is an important factor in spousal support negotiations. Under previous law, a higher-income spouse may have been willing to pay more spousal support because he or she would receive the benefit of a tax deduction. That is no longer possible. Instead the payee spouse receives the benefit under the new law. Previously, the spousal support was considered taxable income to the payee. The payee not only had to pay the tax, but the support may have pushed him or her into a higher tax bracket. Under the new law, the payor loses the deduction so his or her taxable income goes up and may even push him or her into the higher tax bracket. As a result, a payor spouse may press for lower support payments to account for taxes.
A smart lawyer should find ways to mitigate the tax impact on the client as much as possible. For example, the amount the payee spouse receives could be reduced to account for the tax that must be paid by the payor. On the other hand, negotiations could include discussions regarding the actual financial needs of the payee spouse in order to put pressure on the payor spouse to meet those needs by paying more spousal support.
Putting the change in Federal tax law aside, spousal support is still tax-deductible for New York income tax purposes.
In the end, attorneys should take into consideration various settlement possibilities and how they will affect the parties’ tax bill under what is now very different federal and state laws.
If you are divorcing, it’s crucial to have an experienced attorney and financial experts involved in your case to negotiate the best result in your matter. Contact us for a consultation to learn how we can help you.