What the Tax Law Means to California Divorces
Merry Christmas or Bah Humbug. Happy Chanukah or oy vey. These may be just some of the reactions to the new tax bill officially passed by the Congress this morning.
With respect to family law, the thing that everyone’s been talking about is spousal support. Under existing law, spousal support (also known as alimony) is tax deductible to the payor and counts as taxable income to the recipient. But under the new legislation, spousal support/alimony will be treated like child support. It won’t be deductible for the payor, and the recipient won’t have to pay any taxes on it. (By the way, we’re talking about federal taxes, not state income taxes.)
This could have a dramatic effect because the tax treatment of spousal support payments, under both California and federal law, has been particularly potent. This is because the payments reduce the gross income used for computing “adjusted gross income”. They payments are not, by contrast, merely “miscellaneous itemized deductions”. And there presently is no cap on the deductibility of spousal support. In other words, spousal support payments are presently an “above-the-line” deduction.
The law affecting spousal support doesn’t go into effect until January 1, 2019, so it appears that people who are already divorced with spousal support orders won’t be directly impacted, nor will those who finish the process in 2018.
Furthermore, once the law does go into effect, people who had spousal support decrees from before January 1, 2019 can get their orders modified and still have the tax deductibility features.
Some have theorized that the new law will make payors not feel as generous, knowing that the payment is not tax deductible. The recipient might accept less as well, knowing that he or she will not have to set aside some of the money for taxes. So if the idea was to help the government collect more money to make up for tax cuts in other areas of the law, that may or may not work.
The legislation will affect California family law in other ways. For example, under Family Code section 4320, the court is supposed to look at the tax effect of spousal support when making an order. Obviously, the tax effect will be either nonexistent, or at least different from the effect it has now, depending on how you look at it.
The world of California family law will be changing in other ways, too. There will now be a cap on how much you can deduct on your federal taxes for what you pay for state taxes. (In California, where taxes are high, this change alone will be dramatic, though in states with no state income tax, like Nevada, Florida, Texas, Washington, New Hampshire, Alaska and one or two other places, it won’t make a difference.)There are also changes with respect to property taxes and mortgage interest. All of this has a direct impact on child support. That’s because, under Family Code section 4055 and 4059, child support is based, essentially, on four factors: the number of children, the child sharing percentage, and the net income of each parent. Net income basically means gross income minus taxes (and some other things like health insurance, mandatory union dues, and mandatory retirement). So if your taxes change, your net income changes, which means child support, which is calculated by a computer formula, will or should or could change. And if child support changes, that could leave more or less of a person’s estate available, which will have an impact on spousal support, even before you think about the change in deductibility.
The best advice that can be given is to not just rely on a California certified family law specialist, but to consult with a competent tax advisor as well. Even a tax advisor might not have all of the answers, because lengthy legislation that is quickly drafted often contains ambiguous terms or contradictory provisions.
Because federal taxes will be changing for almost everyone (they say this is the most comprehensive tax change since 1986), the software used in child support calculation programs will have to be reconfigured. So before you hire a family law attorney in California, besides making sure that he or she is a certified family law specialist as licensed by the State Bar of California, Board of Legal Specialization, make sure that the lawyer has the most up to date software used to calculate support.
Also, courts will have to update their software, since judges use laptop computers either on the bench or in chambers to calculate support.
There are a lot of unanswered questions, but in time it will be all sorted out. Think about it this way: if you don’t pay or receive spousal support, either because you and your spouse/former spouse have similar incomes or the two of you have decided not to have a spousal support order, at least one part of the order won’t affect you. Others pay or receive so little in spousal support, or pay or receive it for such a short period of time, that the change in tax law may or may not have a dramatic effect.