When divorcing couples are discussing spousal support in California, they need to be aware of the tax implications of their divorce. Federal laws enacted by congress and enforced by the Internal Revenue Service (IRS) are different than laws enforced by the California Franchise Tax Board (FTB).
Spousal Support and Taxes
- IRS rules. Under federal law, a person paying spousal support may not deduct that amount from their federal tax return. In turn, the receiving spouse is not required to list the amount as income on their federal tax return. (IRC §11051)
- California Tax rules. Under California law, the paying spouse may deduct the spousal support amount from their state tax return. In turn, the receiving spouse must claim the amount received as income.
This means an adjustment needs to be made on the state tax return to account for the differences in the laws of the two different taxing authorities. Both spouses need to be sure they fully understand how to deal with this difference when preparing their tax returns and the implications on the net support for purposes of the divorce.
Each ex-spouse will likely hire their own accountant to prepare their tax returns as the rules can be complex and difficult to prepare on their own. If so, each ex-spouse should be sure the accountant they choose is familiar with how tax laws apply to divorces.
Computation of Amount of Spousal Support
In California, a software program, DissoMaster™, is used by family law professionals to calculate child support and temporary spousal support payments.
For child support calculations, there is a column for each spouse. Data is entered about the income and retirement deferrals of each person. Information is entered about how many children are involved and how much time the children spend with each parent. data about tax deductions is also entered.
Common tax deductions that are relevant income include:
- Health insurance.
- Itemized deductions.
- Union dues.
- Mandatory contributions to a retirement plan.
DissoMaster™ then performs the calculations. Gross numbers are entered, and the program calculates the taxes. This lowers the amount of income that is available to pay for support. Child support is always calculated before spousal support and the child support decreases the amount of income for the spousal support calculation. This method more accurately reflects the reality of the spouse’s ability to meet any support obligation.