What are the Current Alimony Tax Laws?
Reaching a favorable and fair divorce settlement requires a lot of care and consideration. It’s not enough to look at the relative income and assets of each party. It’s important to also take into consideration the additional consequences of all aspects of the divorce, including payment of mortgages and other debts, insurance costs and beneficiaries, and the tax implications for any given decision. Tax consequences can significantly change the value or cost of a decision concerning property distribution, division of a family business, alimony, child support, and other financial matters. Below, our knowledgeable Claremont divorce and spousal support attorneys discuss the current tax treatment of alimony following recent changes to the law.
Federal Alimony Tax Laws Since 2018
Prior to 2019, the federal tax system was written in a way that encouraged higher alimony awards. Payers of alimony or spousal support were able to deduct alimony payments from their taxes, whether that alimony was imposed by divorce settlement, divorce judgment, or separation agreement. The recipient spouse, in turn, reported alimony payments as taxable income. Alimony payments were an especially valuable “above the line” deduction from gross income, deductible even if the payer did not itemize their deductions. This system served to reduce disputes over alimony by giving higher-income spouses a strong incentive to agree to higher alimony payments.
The Tax Cuts and Jobs Act of 2017 (TCJA) changed the rules. Effective January 1, 2019, the alimony tax deduction has been completely and permanently eliminated. For anyone who divorces from 2019 onwards, alimony payers are no longer able to take a deduction. Alimony recipients, in turn, no longer have to report alimony as taxable income. The new rules are meant to garner more taxes overall by transferring the tax benefit to the recipient (i.e., the recipient need not report the alimony payment while the higher-income payer will owe all of their taxes for their bracket). In practice, the new law has made settlement negotiations more difficult because of the reduced benefit for alimony payers.
What About Pre-Existing Alimony Awards?
The TCJA applies to divorces or legal separations that were finalized on or after January 1, 2019. If you divorced before 2019, then the previous tax rules apply: The payer can take a deduction, while the recipient owes income tax on the payments. Existing alimony arrangements can be modified to specifically apply the new tax rules to future payments, if the parties choose to do so. There may be circumstances under which the new tax system is actually better for the parties, such as if the recipient has entered into a higher tax bracket.
California State Alimony Tax Laws
Different states reacted to the TCJA in different ways. Some states modified their tax rules to fall in line with federal policy, while other states retained their existing tax schemes. California took the latter approach.
In California, if you pay alimony, you can deduct alimony payments from your gross income. If you receive alimony, you must report those payments as income on your California tax return. That means that your alimony payments will be treated differently between your federal and state tax returns. You will need to ensure that your California tax return specifically reflects alimony payments, rather than simply using your federal Adjusted Gross Income (AGI) as your California income level.
Call a savvy California family law attorney at Blasser Law for help with spousal support, divorce, annulment, custody disputes, or any other California family law matter. The seasoned and effective Claremont divorce legal team at Blasser Law is ready to assist clients with any family law concerns in the San Gabriel Valley or Los Angeles County. Contact our family law office at 877-927-2181.