Deductible spousal support has long been a way to divide family income and save taxes during and following a divorce. The higher wage earner shifts the tax s/he pays on spousal support to the lower wage earner or non-working recipient. The deductibility feature permits the higher wage earner to avoid paying taxes on the money while the lower wage earner pays taxes on the amount of spousal support at a lower rate. For example a 35% wage earner can transfer $30,000 (or whatever the appropriate amount is) to the lower wage earner who may be taxed at 11% or another lower rate on this money. This results in a tax savings to the family. As a result the lower wage earner can receive some of the tax savings in higher payments.
As part of the 2017 Tax Reform Act, the federal government eliminated deductible spousal support, effective January 1, 2019. This permits divorcing parties to continue to use the deductibility feature in orders signed by a judge no later than December 31, 2018.
However, if there is a significant change to an existing spousal support order after January 1, 2019, the transfer will lose the deductibility feature.
Lately, a number of clients who knew that divorce is on their horizon have come to my office with the intent to take advantage of this tax savings option. However, time is running short. Generally, unless both parties to the marriage are ready to end it, it will take some time for the spouse who would prefer to stay married to accept the reality that the marriage is over. To get a spousal support agreement, both parties have to be ready to move forward on the divorce. In other words, the party who is ready to end the marriage needs to start the process to allow the other spouse to adjust.
Another way to receive spousal support is to have a judge order it. However, courts move slowly. At this point in the year (fall), you may not be able to get before a judge fast enough. Many states have waiting periods of 60 days or longer to finalize divorces. The time to start is now.
If you already have a spousal support order, now may also be a good time to review your existing order. Remember, a significant change in an existing order can result in the loss of having deductible spousal support, meaning that the receiving former spouse may receive less than if the support is deductible by the paying former spouse because more money will be paid to taxes.
If either spouse has experienced significant changes in their lives, such as a new position or promotion that increased their pay, or conversely has had a decline in their income, now is the time to address this. Some wage earners may have obtained employment that instead of paying just salary has variable compensation, such as bonuses, stock options or commissions. Drafting an order that addresses variable income using a formula can help protect the order from future change and preserve the deductibility of support.
Congress predicted that the elimination of the deductibility of spousal support will save the government at least $80,000,000 per year in tax revenue. Deductibility of spousal support is a valuable tool to shift income and save taxes. If your family could benefit, now is the time to act on obtaining an order, before this benefit is eliminated.