The recent changes to the United States tax code dramatically changed most American’s tax liabilities for the tax year 2018 and beyond. As of January 1, 2019, alimony has different tax implications for both the payer and the payee. If you expect to divorce this year, you should have some understanding of how this tax code change will affect you.
If you’re seeking a Alimony attorney in San Mateo, or surrounding areas, visit our Alimony page to learn more about Alimony payments and what our attorneys can do for you.
Prior to the change in the tax code for alimony, an ex-spouse paying alimony could write off alimony payments as tax deductions. The recipient did not need to report the received payments as taxable income. As of 2019 these provisions no longer apply. Alimony recipients will need to include their received alimony in their total taxable income for 2019, and alimony payers may no longer write off alimony payments as tax deductions.
Many couples rushed to finalize their divorces before the December 31, 2018 deadline to avoid the changes to alimony agreements. If you and your spouse started divorce proceedings in late 2018 or have not yet received a finalization decree, your divorce will fall under the new tax law, and any alimony agreement will fall under the new tax code for alimony taxability.
This change can have a significant impact depending on how much alimony you pay or receive. Higher alimony payments will increase a recipient’s net taxable income, increasing tax liability and potentially leading to a much smaller annual tax return or no return at all for the 2019 tax year.
Alternatives to Alimony in California
Generally, alimony exists to ensure a lower-earning spouse can maintain a reasonable quality of life following divorce from a higher-earning spouse. If the lower-earning spouse stopped working during the marriage or needs time to find work to support him or herself, alimony can be a tremendous asset. However, both recipients and payers no longer benefit from alimony agreements, and it is generally in any divorcing couple’s best interests to seek alternatives to alimony agreements in 2019 and beyond.
Division of property in divorce is non-taxable, so divorcing couples in 2019 should keep this in mind. While the thought of selling off or giving up valuable personal assets and property may not sound very appealing, the alternative involves navigating the new tax laws for alimony, potentially leading to significantly less out of a divorce than expected.
A divorcing couple could potentially assess their combined net worth at the time of divorce, and then the higher-earning spouse agrees to pay half that amount in a set number of payments. If the couple has children, they may decide on a more substantial child support agreement and forgo alimony altogether if they can reach a mutually agreeable arrangement.
Other Tax Implications of Divorce in 2019
If you sell off real estate or other property to settle your divorce, the proceeds gained or paid could influence your capital gains tax liability. If you sell your home, you could then write off up to $250,000 in capital gains on your tax return for tax year 2019 if you file as single.
The child tax credit has also doubled for tax year 2019, meaning each child under 17 is now worth $2,000 as a tax deduction instead of the previous $1,000. Depending on how much a custodial parent makes, this credit change can lead to significant savings on his or her tax return. The Tax Cuts and Jobs Act also altered tax liabilities for mortgage interest and state and local tax deductions and doubled the standard deduction for everyone.
If you and your spouse plan to divorce in 2019, it is in both of your interests to develop a divorce agreement that does not include alimony. Even if your alimony agreement is temporary, the payments could drastically impact both the payer’s and the payee’s tax obligations.