If you are going through a divorce or beginning to explore your options, there is a lot to think about. While it might not be as important as child custody or asset division, alimony is an aspect that can affect your future and tax obligations.
Whether paying support or receiving it, you need to know about the possible alimony tax implications in California. Let’s look at how it can affect your future tax filings.
What to Know About Alimony and Taxes?
Before 2019, things were simple. You could deduct it on your federal tax return if you paid alimony. If you received alimony, you had to report it as income.
However, that all changed with the Tax Cuts and Jobs Act (TCJA), which took effect for divorce agreements finalized after December 31, 2018.
What does that mean for today? Under federal law, you cannot deduct those payments on your federal tax return if you’re the one paying alimony. And those who receive it do not need to report it as income on their federal taxes.
For those working towards a divorce agreement now, you will not get a federal tax break for paying spousal support. And if you’re receiving it, you will not be taxed on it at the federal level.
However, there are different laws when it comes to your California taxes. Currently, alimony (or spousal support) is still tax-deductible for the person paying. Plus, that support remains taxable income for the person receiving it.
Your state tax return will look very different from your federal one. This can be a bit of a juggling act, depending on your income level, filing status, and whether your agreement is considered “pre-2019” or “post-2019.”
What Happens If You Have a Pre-2019 Divorce Agreement?
If your divorce or separation agreement was finalized before January 1, 2019, the old tax rules apply. However, the new rules may apply if you modify the agreement after that date and specifically agree to adopt the new law.
This is important for anyone wanting to change part of their pre-2019 agreement. If you modify an older alimony agreement, ensure you understand how it could impact your taxes in the future.
Before making any changes, talk with your attorney to know what you could gain or lose from a tax standpoint. A well-intentioned update can come with unintended financial consequences.
How Can You Structure Alimony to Prevent Tax Surprises?
For those proceeding through a divorce, there are a few steps to take to prevent heavy tax burdens. This can help if the new tax rules are going to stretch your budget.
If you are paying alimony, you might consider negotiating a different financial arrangement. For example, you can ask for a larger share of assets up front or agree to cover certain expenses instead of monthly support. Depending on your tax situation, lump-sum payments or one-time property transfers may make more sense than paying monthly support.
For those who receive spousal support, you must report it under California’s tax laws. That means you need to make estimated quarterly tax payments to avoid underpayment penalties at tax time. Along with that, make sure to keep good records of your support payments. You may want to speak with a tax professional to avoid surprises at tax time.
Don’t Get Caught Off-Guard with Alimony Tax Implications
Now that you know more about alimony tax implications in California, you can plan for the future. These payments can affect your taxes in the Golden State, and you need to be prepared.
At Roberts & Zatlin Family Law Firm, we can help you reach an agreement that takes taxes into account, so you are not left with any surprises. Contact us at (951) 381-8147 to schedule a consultation and obtain a free initial evaluation of your case.
