Under Missouri’s family laws, courts can order a party to a divorce to pay two different kinds of support to their soon-to-be-ex-spouse. If the parties have one or more minor children, the court will usually order a parent to pay child support to the other parent. The court might order one spouse to pay spousal maintenance, formerly known as alimony, to the other spouse in some cases. Once those payments start changing hands, are they considered “income” for the purpose of federal taxes? The answer to that question is complicated.
Until recently, the IRS treated child support and spousal maintenance differently. Child support was not considered taxable income, but spousal maintenance was. The tax reform bill passed by Congress in 2017 changed the tax laws, so that neither type of support is taxable as income. This impacts both the person receiving support (the “obligee”) and the person paying support (the “obligor”). The changes to the law took effect at the beginning of 2019.
A final judgment of divorce in Missouri must include provisions regarding child custody and child support. The court must find that these provisions are in the “best interest of the child.” State law does not necessarily require a court to order either parent to pay child support, but it occurs in almost every case involving minor children.
A court can order one spouse to pay spousal maintenance to the other when the recipient lacks the resources to support themselves at the time of divorce. When deciding whether to award spousal maintenance, state law directs courts to consider each spouse’s age, education, resources, and earning capacity, along with factors like the length of the marriage and the standard of living established during the marriage. Missouri referred to this obligation as alimony prior to the 1970’s, and the term can still be found in the Revised Statutes.
Prior to January 1, 2019, spousal maintenance payments were considered taxable income under federal law. The Internal Revenue Code (IRC) specifically included “alimony and separate maintenance payments” in its definition of “gross income.” It defined “alimony and separate maintenance payments” as cash payments made as part of a divorce or separation. Child support was excluded from these definitions. The IRC allowed itemized deductions of spousal maintenance payments. This only applied to an obligation that was clearly defined as spousal maintenance in a final judgment of divorce or other court order.
In practice, this meant that an obligor could deduct spousal maintenance payments from their gross income. The obligee would pay income tax on those same amounts. That way, the money is only taxed one time.
Child support payments were not deductible by the obligor. They were therefore not taxed as income received by the obligee. The obligor pays the income tax, so again, the money is only taxed once.
The Tax Cuts and Jobs Act (TCJA) of 2017 made numerous changes to the IRC and other laws. Section 11051 of the TCJA struck two sections from the IRC altogether. It eliminated § 71, which identified spousal maintenance as part of gross income, and § 215, which allowed itemized deductions of spousal maintenance payments.
The changes to the tax treatment of spousal maintenance took effect on January 1, 2019. According to the IRS, spousal maintenance payments are still deductible for obligors whose divorces were finalized on or before December 31, 2018. The deduction is not available for obligors who:
One might be tempted to think that this is good news for obligees, since they will not be liable for income tax on spousal maintenance if the TCJA applies to them. In some cases, however, this could have a negative impact. Some family law practitioners call the deductibility of spousal maintenance payments the “divorce subsidy,” because it could serve as an incentive for obligors to agree to spousal maintenance. Since the obligor is often in a higher tax bracket than the obligee, the obligee would pay tax on the payments at a lower rate than the obligor would have paid.
Congress took away would-be obligors’ incentive to agree to spousal maintenance. This could mean that divorces will get messier, since more people who need spousal maintenance will have to fight for it. Obligors in a higher tax bracket than their ex-spouses must pay a higher rate of tax on the spousal maintenance payments, which leaves less money overall. This part of the TCJA has only been in effect for a little over a year, so it may be too early to see what changes have resulted.
Mark A. Wortman is a family law attorney who practices in Kansas City, Missouri with an exclusive focus is on divorce, child custody, and other family law matters. Please contact us today online or give us a call at (816) 523-6100 to schedule a confidential consultation with a knowledgeable and skilled legal advocate.