Beginning of the End: How the Loss of the Spousal Support Deduction May Affect Future Agreements
When I agreed to write an article on the various changes to the Family Code in 2018, the new tax law (IRC Section 11051) had not been passed, but there was, and continues to be, substantial speculation on how the proposed elimination of the deductibility of spousal support would affect all the agreements we had drafted over the years, as well as those we were trying to finalize before the end of 2017. I am not a tax expert; however, the tax implications of any spousal support order are an issue that family law attorneys must address on a regular basis. It is always good practice to consult with a tax professional when negotiating or litigating spousal support, but with this new tax law it will be more important than ever.
In the past, the parties had the several options to consider regarding how spousal support would be paid.
1) Spousal support could be deductible by the payor and taxable to the payee (so long as the agreement contained the language required by IRC Section 71(b)(2));
2) Not deductible by the payor and not taxable income to the payee; and
3) Family Support, in which the payor would pay what was usually a higher combined payment of spousal and child support, but the entire amount would be deductible by the payor and table income to the recipient1.
There were pros and cons for each of the options depending on the financial situation and goals of the parties. The practical effect of allowing the payor to deduct his/her spousal support or family support payments was to create more net spendable income for the payor from which he/she could pay more spousal or family support to his/her former spouse. Depending on the amount of support being paid, the payee was generally in a lower tax bracket and would be taxed at a lower rate. The law has now been amended to eliminate the deductibility of the support as well as the obligation of the payee to claim the payments as income for tax purposes. The initial question in response to this change in the law was whether it would result in a flood of modification hearings to recalculate the support based on the shifting tax burden or if the modification hearings would suddenly dry up because the parties do not want to have to address these new tax issues. The true impact has yet to be seen, but IRC 11051 states that it applies to the following: 1) any divorce or separation agreement (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act), executed after December 31, 2018; and 2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification. (emphasis added). Based on this language it appears that the changes apply to agreements after December 31, 2018. Does this mean that for agreements executed before December 31, 2018 and modified after December 31, 2018, it is up to the parties to decide whether future modifications will incorporate this change in deductibility? If so, this new law may not have much of an impact on the agreements executed before December 31, 2018 since it appears you may have the option of including language that the amendments made by S11051 do not apply. If that is in fact the case, then we will need to focus on agreements/instruments executed after December 31, 2018. Fortunately, the delay in the effective date for the instruments as set forth in Section 11051 gives us some time to figure this out. I trust there will be many opportunities to attend seminars discussing the full impact of these tax changes and how to best address these issues in our family law practice.
Other notable changes to the Family Code effective January 1, 2018 include:
Low Income Adjustment in Child Support:
Family Code Section 4055 has been modified to so that the net disposable income threshold that was supposed to be reduced from $1,500 to $1,000 on January 1, 2018, will be maintained at $1,500 and adjusted annually for costs of living increases until January 1, 2021. This means that an obligor with a net disposable income of $1,500 per month will continue to have a rebuttable presumption that he or she is entitled to low-income adjustment to his or her child support obligation.
Mediation for Child Custody and Visitation:
Family Code Section 3170 has been amended to authorize a party, prior to filing the petition, application, or other pleading to obtain or modify a temporary or permanent custody or visitation order, to request that the court set a custody or visitation issue for mediation and would authorize the court to do so. Previously, the court was only required to set the contested issues for mediation when it appears on the face of a petition, application, or other pleading to obtain or modify a temporary or permanent custody or visitation order that custody, visitation, or both are contested. This amendment will remain in effect until January 1, 2020. It is unclear how the mediation dates will be assigned, especially with the new tiered system that will be going into effect at Family Court Services on March 1, 2018.
Authorization to Keep Minor’s Information Confidential:
Family Code Section 6301.5 is a new statute that establishes the right of a minor or legal guardian of a minor to request a protective order to keep minor’s information confidential. The minor must show a substantial probability that the minor’s interest will be prejudiced if the information is not kept confidential and there is no less restrictive means to protect the minor’s privacy. In such cases, the information regarding the minor will be maintained in a confidential case file and shall not be part of the public file in the proceeding or any other civil proceeding. Disclosure or misuse of that information is punishable as civil contempt of court with a fine of up to $1,000. An order of civil contempt under this subdivision shall not include imprisonment. To the extent necessary for the enforcement of the order and to allow the respondent to comply with and respond to the order, confidential information shall be included in the notice sent to the respondent pursuant to this part. The notice shall identify the specific information that has been made confidential and shall include a statement that disclosure or misuse of that information is punishable as a contempt of court.
These are just a few of the changes that will affect the practice of family law in 2018. It looks like this will be a very interesting year.
[1] “Orders and stipulations otherwise in compliance with the statewide uniform guideline may designate as “family support” an unallocated total sum for support of the spouse and any children without specifically labeling all or any portion as “child support” as long as the amount is adjusted to reflect the effect of additional deductibility. The amount of the order shall be adjusted to maximize the tax benefits for both parents.” (Fam. Code §4066.) A family support order, may be made by agreement of the parties or order of the court. (Fam. Code §92.) See also: C.I.R. v. Lester (1961) 366 U.S. 299, 6 L.Ed.2d 306, 81 S.Ct. 1343,