How the Tax Cuts and Jobs Act Affects Divorce
The Tax Cuts and Jobs Act (TCJA) was signed into law nearly three years ago to reform individual and corporate income taxes. Among the most significant changes for individuals is seen in divorce-related costs. Still, while these changes have been implemented nationwide, there are some exceptions at the state level.
Changes to Alimony
The TCJA benefits spouses who receive alimony, while imposing a new financial burden for those who pay it. Alimony payments from divorces finalized on or after January 1, 2019, follow these new federal tax rules:
- The payor cannot claim alimony as a tax-deductible
- The payee is not taxed on received alimony payments
Changes under the TCJA stem deeper to affect the money being used to fulfill alimony obligations. According to the TCJA, when using funds from an Individual Retirement Account (IRA) to satisfy alimony dues:
- The payor is not taxed on withdrawal
- The payee is responsible for the taxes incurred from the IRA withdrawal
- The payee cannot invest alimony from this source into their own IRA, even if this is their sole source of income
These new rules complicate the recipient’s ability to properly save and plan for their future.
California State Tax and Alimony
While the TCJA affects federal taxes, California still allows payors to deduct alimony from their state income taxes. In order to benefit from these state deductions, paying spouses must:
- File taxes separately from the alimony recipient
- Make alimony payments by cash, check, or money order
- Not live with the alimony recipient
- Not treat the alimony payments as something other than that, such as child support
- Not have an agreement saying that the money is something other than alimony
- Not have an agreement that calls for payment to continue after the death of either party
If the payor satisfies these criteria, they may deduct alimony from their state taxes. Congruently, the payee is subject to state income tax on received alimony.
Additional Effects of the Tax Cuts and Jobs Act
There are a few additional changes under the TCJA that divorcing couples should be cognizant of:
- Legal fees from your divorce are now regarded as a personal expense and are no longer eligible for use as a deductible
- Child support is no longer a deductible for the payor
- Child support is not taxable for the receiving parent
Our lawyers will help you understand the extent to which TCJA changes could affect your divorce. Contact Gille Kaye Law Group, PC today for more information.