2018 note: The Tax Cuts and Jobs Act (TCJA) of late 2017 eliminates the deductibility of spousal support beginning in 2019 with new divorce agreements. However, for state income tax purposes, California still allows the deductibility of spousal support for the payer and treats spousal support received as taxable income.
There are basic rules for making spousal support tax deductible. This post discuss two somewhat unusual but important circumstances that affect the tax deductibility of spousal support.
Spousal Support Tax Deductible Limits
Property Settlements Disguised as Spousal Support
When a couple transfers property to each other pursuant to the division-of-assets portion of their divorce agreement or decree, these transfers are generally not taxable or tax-deductible. However, spousal support is normally tax-deductible. To discourage divorcing couples from trying to reduce their taxes by disguising property transfers as spousal support, the IRS has “alimony recapture” rules. To make your spousal support tax deductible, be sure to structure your support so that it is not subject to recapture by the IRS.
The rules apply when spousal support payments decrease by more than $15,000 over the first three years. For example, if $18,000 is paid each of the first two years and then the support payments stop, recapture would apply. If however the same total amount is paid over three years ($12,000 per year), there would be no recapture.
If you are subject to this rule, you have to include in your taxable income in the third year part of the spousal support payments you previously deducted. Your spouse will deduct from her taxable income in the third year part of the spousal support payments he or she previously included in income. The exact amount of the recapture is a fairly complicated calculation.
If you think this might apply to your situation, you may want to get advice from a Certified Divorce Financial Analyst or other tax professional with divorce experience.
Child Support Disguised as Spousal Support
Since child support is not tax deductible and spousal support generally is, couples have been tempted to characterize child support as spousal support. IRS rules make an effort to detect this by taking note of the timing of reductions in spousal support. These reductions are sometimes spelled out in the divorce decree or settlement agreement.
If spousal support is reduced six months or less before or after the date when child support would no longer be payable (say because the child has reached the age of 19 in California), the amount of the spousal support reduction is considered by the IRS to be non-deductible child support. The same is true when a spousal support reduction is based on the occurrence of any pre-planned child-related contingency (such as the child completing a certain year of school).
Therefore to make all of your spousal support tax deductible, structure planned decreases so as to not coincide with major events of the children as described above.
Family Support
There is an infrequently used way to combine child support and spousal support into a single payment called “family support,” the entirety of which can be tax deductible.
