Spousal support in CA: Why does the date of the settlement matter?

Getting a divorce is an emotionally intense and legally complicated matter. In addition to going through a major change in your personal life, you must also navigate state and federal laws that impact the transition from married to single life. These laws can address everything from the split of property to where your children will live. Like all legal matters, the laws that govern the divorce can change. Change can result from court holdings and the passage of new laws.

We are currently in the midst of such a change.

What change has impacted divorce in California?

The Tax Cuts and Jobs Act (TCJA) impacted more than just income tax returns. It also changed how you may view your divorce. A provision within the TCJA directly impacts the taxation of spousal support payments.

In the past, the individual making a spousal support payment could deduct the payment from his or her tax return. The person receiving the payment would then need to account for the funds as income on his or her tax filings.

This is no longer the case.

The TCJA removed the provision that allowed for the tax deduction. After December 31, 2018, alimony is no longer deductible on the payor’s tax filings and the payee will no longer report the funds on his or her income returns.

How will this impact divorce in CA?

The local legal system has had a flood of accelerated divorces. These divorces are being pushed forward in an attempt to finalize the settlement before the December 31, 2018 deadline. Thus, the date of the divorce settlement agreement matters. Anyone that finalizes their divorce on or prior to December 31,2018 will abide by the old tax rules. After this date, the new rules apply.

In some cases, couples that cannot come to a final agreement could still resolve the spousal support issue before the December 31, 2018 deadline. A legal process known as bifurcation may be an option. Bifurcation allows for the couple to sever one legal issue from the agreement. In this case, it could result in the ability to remove and finalize the spousal support issue within the allotted timeframe while dealing with the rest of the divorce settlement agreement at a later date.

The impact of federal taxes on spousal support payments is just one element to consider when drafting a divorce settlement agreement. Additional considerations can include the impact of state law (discussed in a previous piece available here), property division and child support obligations as well as child custody arrangements. Those going through a divorce can better ensure these and other legal issues are accounted for by seeking legal counsel.