We’re lawyers. We have to start a blog post answering whether you have to pay income tax on alimony with a caveat. So, for the record, the answer is complicated and may change at any time. Thank you for your patience. Now that we have that out of the way, let’s take a look at why it is so complicated, and how you can know, right now, whether you will have to pay income tax on alimony (known as spousal support in California) payments.
Before we begin, you may want to open a second link to the Tax Cuts and Jobs Act (TCJA), a piece of legislation that went into effect in 2018 (and really affected divorcing couples starting in 2019). Not interested in reading the fine print of federal legislation? We do not blame you, but that is exactly why this question, “Do you have to pay income tax on alimony?” gets so complicated.
A Shifting Federal Tax Landscape
Depending on how current your knowledge of tax law is, you probably think of spousal support (formerly called alimony) payments as tax deductible. This meant that the higher-income earner who paid a monthly amount to help support their low- or non-incoming earning ex-partner could deduct those payments from their state and federal taxes. In many ways, this was a win-win, helping the person paying have at least one tax benefit and helping the person who received to have a bargaining chip in negotiating for higher monthly payments. The receiving party had to report any spousal support payments as income.
Recently, however, the tables have turned. The TCJA was passed in late December 2017, and one of its big implications was doing away with the federal income tax deduction. In other words, the paying party can no longer deduct spousal support payments from their taxes, while the receiving party no longer has to pay taxes on their spousal support. This has big implications on negotiations (and litigation) surrounding divorce.
And now it is probably time for another caveat: As you have seen, tax law can change—radically—on relatively short notice. If you are thinking about or in the process of getting a divorce, you should consult with a professional (tax and legal) before making big economic decisions.
What It Means for Californians
In California, it gets a little more interesting. While the TCJA did away with federal deductions, state tax law continues to allow paying spouses to deduct spousal support from their state income taxes. Currently, in order to qualify for the state deduction, the paying party must meet all of these criteria:
- The paying party does so in cash, check, or money order. It cannot be items (cars, groceries, etc.).
- The paperwork governing your divorce (or separation) does not identify the payment as not alimony. Yes, that double-negative is intentional.
- You live separately when making the payment.
- Your responsibility to make spousal support payment ends upon the death of either party.
- Your spousal support payment is not your child support payment.
Unlike federal income taxes, currently California tax code considers spousal support taxable, so the receiving party will have to report any spousal support payments as income.
As For the Future of Income Tax on Alimony? It Is Complicated
We would not be good attorneys if we did not remind you how complicated tax law and the legal code—including the case law that controls how the courts interpret it—can be. As you think about your future, whether you are considering a divorce or paying or receiving spousal support under an old agreement, do your homework before making any modifications that may impact your tax status. Unfortunately, for many payors, the tax deduction made a sizable impact on their take-home income, and the new rules of the TCJA may have an outsized impact on their income.
The California Franchise Tax Board website has free resources that can help you understand the state of tax law and IRS.gov addresses many questions you may have about federal taxes. If you are thinking about or going through a divorce, however, you may want to consult with a professional. Fortunately, online reviews and resources make finding a good attorney in the Bay Area easier than reading the tax code.
At Van Voorhis & Sosna, we have helped hundreds of clients negotiate, mediate, and litigate spousal support arrangements. We know the complexities of divorce and tax law in the Bay Area because family law is our sole focus. We offer legal advice and representation based on integrity, trust, and understanding. Contact us today, or call 415.274.2530 to schedule a free legal consultation.
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