In 2017, the Tax Cuts & Jobs Act (TCJA) altered the federal tax treatment of spousal support by eliminating it as a tax deduction to the payor. This law also made other changes to the tax code including raising the estate and gift tax exemption and changing certain tax rates. Many provisions of the TCJA are set to expire December 31, 2025, unless Congress takes action to extend the law or make the cuts permanent. However, the tax-deductibility of spousal support is not one of the provisions that will expire and will remain the same.
How Did the TCJA Change the Taxation of Spousal Support?
Prior to the TCJA, spousal support was tax-deductible to the payor spouse. It was widely believed that a payor spouse would be more willing to pay a higher amount of spousal support if he or she would receive a tax deduction equal to the spousal support payment. Consequently, the payee paid the income tax on the support, which could push him or her into a higher tax bracket.
Starting with spousal support agreements signed after December 31, 2018, the TCJA provided that payors could no longer take the deduction. Since that time, payor spouses have pushed for lower support than they might have before the TCJA because they now pay the tax on the spousal support payment under Federal tax law.
The TCJA was a significant change to long-standing tax rules. The rationale for the law was that it helped the Federal government make up revenue lost from giving some of the other tax cuts in the TCJA. Under prior law, the payee (who is the lower-earning spouse and likely in a lower income tax bracket) paid income taxes on the support. With the TCJA, the payor (who is the higher-earning spouse and likely at a higher income tax bracket) now pays the taxes so the government collects more money.
Will the TCJA Spousal Support Provision Expire in 2025?
As noted above, the spousal support deduction provision will not expire in 2025. Therefore, payors will not be able to take a Federal tax deduction for their spousal support payments unless Congress enacts a new law to change the rules again.
How Is Spousal Support Taxed in New York?
Regardless of the Federal tax laws, payors can take a tax deduction for spousal support under New York State tax law. This is the opposite of Federal law. As a result, negotiations over support should take into account the different tax treatment at the Federal and New York State levels.
It’s important to note that divorce attorneys have been negotiating around this issue since the TCJA went into effect and there are tactics that can help mitigate and/or balance the tax burden between the parties. The key is to work with an experienced lawyer and financial experts.
Please feel free to contact us to learn how we can help you achieve a positive result in your matter.
