The state of California recently passed a new alimony tax law that eliminates the ability to list spousal support as a deductible expense for the payer on federal income taxes. Recipients of alimony also will not be able to report the payments as taxable income. The new law will apply to all alimony payments made under post-2018 agreements. With the new alimony tax law in mind, some couples in California are changing their divorce plans. Some are changing their alimony demands while others are proceeding with help from family lawyers.
What Is the New Alimony Tax Law?
As of January 1st, 2019, California’s new tax law changed the way couples must list alimony payments on their federal tax forms. The previous law stated that alimony payments were tax-deductible for the payer and taxable income for the recipient. Now, this is no longer the case. The new law eliminates the ability to deduct alimony payments, meaning payers will no longer benefit from listing alimony as a tax responsibility deduction. It also reverses the rule that recipients must list alimony as earned taxable income.
How Will the Tax Law Affect Your Divorce?
The new tax law for divorced couples came as part of the Tax Cut and Jobs Act, which made several significant changes. It reformed itemized deductions, expanded the child tax credit and simplified individual income taxes for millions of people. Upon the announcement of the new law, many couples rushed to complete their divorces in California before the December 31st, 2018 deadline. Couples wanted to finalize their divorces before the deadline to still receive the tax benefits.
If a judge did not finalize your divorce by the deadline, the new tax law will apply to you and your ex-spouse’s divorce. Filing for divorce before the deadline does not change anything. The judge must have finalized the divorce decree before January 1st, 2019. If you made the deadline, the old law will apply, enabling the payer to list alimony as a deduction and the recipient to list it as taxable income.
If you missed the deadline, you and your ex-spouse must obey the stipulations of the new alimony tax law this tax season. If you sell real estate while settling your divorce case, what you earn from the sale could change your capital gains tax liability under the new law. You could write off the amount you make from the sale on your tax return if you file as single.
A new child tax credit may also impact your divorce case. Starting in tax year 2019, the government is doubling the child tax credit. Each child under the age of 17 in the taxpayer’s household now qualifies as a $2,000 tax deduction instead of $1,000. This could lead to significant tax savings for the custodial parent after a divorce involving children.
Payment Methods Besides Alimony
Alimony may not be the best type of spousal maintenance payment structure for you after the passing of the Tax Cut and Jobs Act. Consider an alternative form of payment. Rather than opting for traditional alimony, you and your spouse may be able to create a payment plan in which one spouse pays the other a certain sum in multiple payments over time. If a judge signs off on this plan, the couple can do this instead of traditional alimony to avoid the changes the new law will bring.
Couples can also opt for a large one-time sum rather than monthly alimony payments. This arrangement can alleviate ongoing tension between the couple and potentially save money on taxes. Choosing an alternative to traditional alimony in your divorce settlement could save you and your spouse substantial money at tax time.
You may be able to retain the ability to list the payments you make to your spouse as a deductible expense if you do not choose traditional alimony. If you are the recipient, you may still be able to list the payment as taxable income if that helps you meet a certain tax bracket. Work with a financial advisor and an San Francisco divorce lawyer for more assistance with your specific divorce case under the new alimony law.