After months of uncertainty the court finally entered a judgment in your divorce proceedings. To your relief, the judgment included a spousal support order and you’ve been receiving payments from your former spouse for about a year. The payments have come in handy and you’ve used that money for important household bills. All is well until your accountant calls to tell you that you owe hundreds of dollars in taxes. Unfortunately, when you started receiving spousal support, you didn’t realize that you would be taxed on those payments. This is a mistake that could cost you thousands.
Taxation is an important consideration that is often overlooked regarding spousal support. Both the party ordered to pay spousal support and the person receiving the support should be aware of the tax consequences of the support award in order to prepare for any tax ramifications once payments begin. Ideally, both federal and state tax implications should be considered during divorce or separation proceedings so a spousal support agreement may be reached that minimizes the tax consequences for all parties involved.
There are both federal and state tax implications for spousal support awards. Usually, spousal support is tax deductible for the person who is paying spousal support. The spousal support payments received by the supported spouse are considered to be taxable income. This is only the case for couples who have a final court order. If a couple does not have a final court order of legal separation or divorce, spousal support payments are considered gifts for tax purposes which are not deductible for the paying party nor considered income for the receiving party.
For federal tax purposes, strict IRS guidelines must be followed for the spousal support payments to be tax-deductible. The support payments must be 1) authorized by a court order for divorce or legal separation; 2) in cash; 3) not part of a property division or child support payment; and 4) paid only while the spouses are not members of the same household.
Each state has its own guidelines for taxation of spousal support. In California, spousal support is tax-deductible for the paying spouse and taxable for the receiving spouse, as long as the spouses file separate state tax returns.
The law is more complicated when it relates to partner support. Federal tax laws were not changed to recognize domestic partners and states other than California may not have laws that consider the legal validity of a domestic partnership. A California attorney experienced with issues relating to domestic partnerships can advise you on the federal and state tax implications of a partner support award.
When seeking a spousal support award, it is imperative to retain an attorney who is knowledgeable about how to structure support awards to ensure the best possible tax benefits. The knowledgeable attorneys at the Law Offices of Judy L. Burger are experienced with spousal and partner support awards and the tax implications. Call us now at (415) 293-8314 to schedule your private appointment regarding your California divorce case or visit us online to find out more about how we can help.