If you have a support order in place, it likely has a significant impact on your finances. Spousal and child support orders may require hundreds or even thousands of dollars to be paid every month, and they scale with the paying party’s income. If you are required to pay support, that can significantly reduce your discretionary income. In contrast, receiving support gives you additional financial freedom to maintain your quality of life.
In either case, you likely have an important question come tax season: how do support funds affect your taxes? The federal laws on this subject changed relatively recently, so many resources about it are now out of date. Here’s what you need to know about how taxes account for these orders and how you can minimize their impact on your tax bill.
Changes to IRS Regulations About Child and Spousal Support
In 2018, a new law was passed by the federal government. Called the Tax Cuts and Jobs Act, the bill affected broad swaths of the tax code, including how the IRS should address child and spousal support funds. Prior to the bill, these kinds of payments were deductible for the payor and taxable for the payee. However, that is no longer the case.
Today, support orders issued or modified after December 31st, 2018, are not considered deductible expenses for payors. The current understanding is that the funds being paid in alimony or child support would have been used to make discretionary, non-deductible purchases if the couple had remained together. As such, they are treated as any other discretionary expense and do not reduce the paying party’s tax burden.
As a corollary, these funds are not considered taxable income for the recipient. The income they represent is already being taxed at the paying party’s presumably higher rate. Any alimony or child support you may receive will not increase your taxes going forward.
While this change places a higher burden on paying parties, it reduces the financial strain on recipients. Since most people who receive these payments have lower income or more financial obligations than paying parties, the bill’s authors determined that this was both fairer to all parties and less complicated for the IRS.
How Modified Support Orders Affect Your Tax Burden
The new tax regulations have been in place long enough that most new orders are drafted with the changes in mind. California courts must consider a support order’s knock-on effects on your tax bill. If you received a brand-new order, the monthly payments were calculated with this in mind from the beginning.
However, this may not be the case if you have modified a alimony order after 2018. According to the IRS, any modification to divorce decrees, separate maintenance decrees, or written separation agreements that “changes the terms of the alimony or separate maintenance payments” may be subject to the new tax law. If you did not consider the changes when drafting the new order, you could face a significantly different tax bill than you expected.
For example, suppose you had a spousal support order in place in which you paid your ex-partner $1000 a month, or $12,000 annually. If you make $100,000 per year, that $12,000 deduction would drop you into a lower tax bracket, potentially saving you thousands during tax season. However, if the order was modified this year, that $12,000 may no longer be deductible, and you could be required to pay thousands more than you expect.
If you plan to modify your order in the future, the IRS has given you a way to avoid this penalty. If your modified agreement does not explicitly say “that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse,” it is not subject to the new law. It is vital that you confirm the wording of your modified order before you pay your taxes to determine whether the change applies to you.
Strategies to Minimize Your Tax Obligations After Support Orders
Whether you have a new alimony order in place or modified it in the recent past, it is worth considering how to minimize your tax bill. Strategies for reducing the financial impact of a support order during tax season include:
- File as Head of Household If Eligible. If you have primary custody of a dependent, you can file as a Head of Household. This grants some of the benefits of filing jointly with a spouse, reducing your tax bill in recognition of the costs of raising a child.
- Remain in Good Standing With Support Payments. Refusing to pay ordered funds is never the best solution. If you fall behind on payments, accidentally or on purpose, your tax return may be garnished to cover what you owe the other person.
- Consider Requesting a Modification. If you have not recently had your order modified and you’ve experienced a substantial financial change since it was issued, you can request a new modification. You may be able to have the amount lowered to account for your current financial circumstances, reducing the amount you will pay in taxes next year.
Consult With Expert Spousal Support Attorneys to Understand Your Options
Child and spousal support orders can make your finances significantly more complex. If you have concerns about how a potential new or modified order may impact your taxes in 2023, do not hesitate to consult with the skilled Marin County high-asset divorce attorneys at Kaspar & Lugay, LLP. We can help you walk through your spousal support order and understand the consequences of a change, so you know what to expect during tax season.