The Complicated and Dynamic Tax Issues Related to Alimony
The end of a marriage is rarely a simple endeavor. Even in a no-fault divorce, reaching decisions about major issues can be incredibly stressful. One of the most complicated matters is spousal support, and unfortunately, even a finalized court order doesn’t mean the headaches are over. That’s because there are tax implications of receiving and paying alimony.
Whether former partners reach their own agreement or a judge dictates the terms of spousal maintenance, few people consider that issues of taxation are always involved. Instead of just paying or receiving alimony, you now have to understand what this means for your tax returns and any potential refund or amount owed the government calculates.
Fortunately, there are some basic rules that can help you better understand these issues.
Federal Tax Implications for Paying Alimony
The bulk of the taxes any individual pays goes directly to the federal government. Unfortunately, the federal tax implications of receiving or paying alimony are not set in stone. We saw this with the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. While the title of this legislation doesn’t mention divorce, it certainly has a significant effect on it.
That’s because individuals who are ordered to pay alimony can no longer deduct these payments from their taxable income. The TCJA dictates that any divorce finalized after December 31, 2018 will not allow spousal support payments to be deducted. This can add a significant financial burden on those paying alimony.
Fortunately, anyone whose divorce was finalized before the cutoff date can still deduct spousal maintenance from their taxable income.
Federal Tax Implications for Receiving Alimony
Before January 1, 2019, individuals receiving spousal support payments were not able to use all that money to cover their needs and expenses. That’s because the federal government taxed alimony payments as if they were income. However, the implications of the Tax Cuts and Jobs Act are far-reaching. In this case, they’re beneficial for the recipient.
Any alimony orders issued at the finalization of divorce after the cutoff date are not considered taxable income by the federal government. As is the case with individuals paying alimony, the TCJA does not affect spousal support orders issued up to December 31, 2018. Recipients whose divorces were finalized before this point still have to pay taxes.
However, this may not be permanent. As it turns out, the tax implications of paying and receiving alimony can change if an order modification is issued.
What About Modifications?
Not all alimony orders are set in stone — even when nothing happens (e.g., death, remarriage) to end such orders. If there is a substantial change in circumstances for either party, a request for a modification can be submitted to the courts. Modifying a divorce order requires clear evidence that such a change is needed. If approved, there are additional tax implications.
Envision a scenario where an alimony order was issued prior to the changes in the TCJA taking place. The recipient would have to pay taxes on their spousal support. Now, imagine that the modification to that order occurs after the law took effect. In such a situation, it’s important to look at the language contained in the modification.
Specifically, a modification can state that the TCJA treatment applies. In this case, the alimony payments will fall under the new taxation rules. This means payments will be non-deductible for the payer and non-taxable for the recipient. Because of the major tax implications for receiving and paying alimony after a modification, it’s typically advisable to seek legal counsel.
State Tax Implications for Alimony Payments
Anyone who pays taxes knows that it’s not just the federal government that wants money. Every year, workers also have to contribute a portion of their income to the state where they’re working. As it turns out, there are also state tax implications for paying and receiving alimony. However, these implications can vary depending on where you reside.
For instance, California does not conform to the new TCJA treatment when collecting state taxes. This means alimony payments are treated as taxable income for the recipient, and the payer can write off their payments. However, states like New Jersey do conform to the new rules.
This can greatly simplify tax issues in the states that follow TCJA guidelines.
However, this doesn’t necessarily mean dealing with these issues will be simple.
Documentation and Reporting
When the Tax Cuts and Jobs Act was passed, it simplified tax documentation for everyone. However, this simplification was positive for some and negative for others. Prior to the law going into effect, the payer used IRS Form 1040 to claim an “above the line” deduction. On the other hand, the recipient had to report these payments as income on their Form 1040.
Clearly, this has changed for divorces occurring after 2019. The payer cannot deduct these payments, so there’s no need to report them on Form 1040. Additionally, the money received by the recipient is no longer considered taxable — so they don’t have to report anything on Form 1040 either. Filing taxes is easier for everyone, even if the outcome isn’t always beneficial.
Getting the Most Out of Your Divorce Order
Clearly, the tax implications of paying and receiving alimony are significant. Whatever position you find yourself in — payer or recipient — it’s important to get the most out of your divorce order. This can minimize any potential negative outcomes related to taxes.
Put simply, seeking legal counsel is likely in your best interest. An experienced family law attorney can review your case and work for a fair outcome regarding alimony payments. And if you think your current order is unfair, they can help you better understand your options.
At Edens Law Group, our team is committed to securing a favorable outcome on your behalf. Contact us at 908-529-0353 to schedule your confidential case evaluation today.
