Ever since I have practiced law, a former spouse who paid spousal maintenance could deduct the amount paid from his or her taxable income, and the recipient of spousal maintenance had to declare the payments as income and pay income taxes on them. This is a useful negotiating tool in settling spousal maintenance cases.
Starting in 2019, the IRS will no longer consider alimony payments as tax deductible for the party making the payments or as taxable income to the party receiving the payments. This is a major change and it was a part of the Tax Cuts and Jobs Act passed by Congress and signed into law by President Trump earlier this year. This is very favorable to the recipients of spousal maintenance.
This new change also makes the law more uniform. Before 2019, spousal maintenance payments will be tax deductible to the party making the payments and taxable income to the party receiving them, but child support payments are and have always been just payments. They are not deductible for the party making the payments and are not taxed as income to the party receiving them. The new law now treats child support payments and spousal maintenance (alimony) payments the same.
An important part of the new law is that it only applies to court orders made beginning in 2019. If an Arizona family court orders a party to make spousal maintenance payments before 2019, the payments will remain tax deductible for the party making the payments and taxable income for the party receiving them. For example, if a family court judge ordered a party to pay spousal maintenance for a period of 20 years in the year 2018 (or any year before 2018), the spousal maintenance payments will always be deductible for the party making the payments and taxable income for the party receiving them, even after 2018. If a family court judge makes the same order in 2019 (or any year after 2019), the payments are not deductible for the party making them and are not taxable income to the other party.
Does this make sense? I’m not sure. On one hand, it makes sense to have uniformity and simplicity in the law. Taxing spousal maintenance payments and child support payments in the same way helps achieve that end. It also makes sense to not tax support payments to the recipient, thereby increasing the need for support. Courts base spousal maintenance payments on need. On the other hand, spousal maintenance payments really are income to the party receiving them and it makes sense that if we are going to tax income we should tax it to the party ultimately receiving it. It doesn’t seem fair to force someone to support his or her former spouse and tax those payments to that person on top of it. No matter who gets taxed, the government wins and an individual loses.
How will this change divorce in Arizona? One way seems clear. Family court judges consider the fact that the federal government taxes spousal maintenance payments to the recipient and take that into consideration in making their rulings. Starting in 2019, they will no longer make that consideration. Therefore, spousal maintenance awards may go down slightly, but the recipients of those awards will not have to pay taxes on them. Other changes are more speculative. Arizona law requires the court when calculating child support to deduct spousal maintenance payments from one party’s income and attribute them as income to the party receiving them. Will Arizona child support law change to be consistent with the new federal income taxation law? We don’t know. With our federal system of government, Arizona’s child support laws do not have to treat spousal maintenance payments the same way that the federal government’s income tax laws treat them. We can only wait to find out.