For years, people got used to the idea that alimony was taxable as income and created a tax deduction for the spouse making payments. Then a few years ago, the federal laws changed. But what about California laws? And what about alimony agreements established before the tax laws changed?
State laws differ from federal laws in the way alimony is treated for tax purposes. So here we describe the basics on taxation of alimony in California. If you are creating a plan for alimony as part of a divorce or separation, it is wise to keep tax consequences in mind. The experienced team at Holstrom, Block & Parke, APLC can help ensure that you understand tax implications of your situation and help develop a plan that provides a fair allocation of obligations keeping the current tax factors in mind.
Federal Tax Treatment of Alimony
January 2019 was the start of the new rules for taxation of alimony at the federal level. If you are paying or receiving alimony based on a separation agreement or divorce decree executed before 2019, then you continue under the previous rules, meaning that if you receive alimony, it is generally treated as taxable income, and if you pay alimony, it is generally counted as a tax deduction. You can claim this deduction even if you take the standard deduction and do not itemize other deductions.
For alimony paid under the terms of an agreement executed in 2019 or later, alimony is not included in the federal gross income of the recipient and it is not tax deductible for the spouse or partner making payments. Moreover, if you were divorced before 2019 but you modified your divorce or separation agreement in 2019 or later, and your decree includes language indicating that the repeal for the deduction of alimony payments applies to your modification, then the new federal tax treatment applies to your situation as well.
Alimony for Purposes of California Income Tax
The Franchise Tax Board for the State of California does not follow the new federal rules when it comes to alimony. This can make it challenging to calculate state taxes because you may need to adjust your gross income, a figure used to calculate many state tax obligations.
For California income tax, just as with federal income tax for divorce agreements entered into prior to 2019, anyone receiving alimony payments needs to report those payments as income on their state tax return. Those paying alimony to a former spouse or registered domestic partner may be allowed to deduct the payments from income on their California returns.
For purposes of filing state returns in California, if alimony is paid under the terms of a pre-2019 agreement, then tax treatment is consistent with federal treatment, and the income and deductions will be included in the federal adjusted gross income. For alimony paid under the terms set or modified in 2019 or later, California taxpayers will need to make adjustments in Schedule CA to account for alimony payments, either as additional income for recipients or as a deduction for payors.
Account for Tax Treatment of Alimony When Developing Your Separation or Divorce Agreement
When figuring out the alimony, division of assets, and other financial matters involved in a divorce, it is crucial to take tax implications into account. Factor amounts into the calculations to help ensure that a spouse receiving alimony will have enough after taxes to provide resources to meet needs. Remember that a spouse paying support will receive a tax break on the state side of calculations at least, and this can help provide adequate resources to fulfill alimony obligations.
Not All Payments Between Former Spouses Constitute Alimony for Tax Purposes
The IRS has clear rules for determining whether payments constitute alimony. Essentially, payments that are not specifically required by a divorce order or separation agreement are not considered alimony for federal tax purposes. For instance, if a spouse makes payments voluntarily to provide support or payments that are technically part of a spouse’s community property income, those payments are not eligible for tax deductions.
Let Holstrom, Block & Parke Protect Your Interests in Divorce
With over 300 years of combined experience, the team at Holstrom, Block & Parke is ready to help calculate tax impacts and negotiate for advantageous determinations when it comes to the amount and duration of alimony. We can assist with establishing initial arrangements or seeking court orders to modify arrangements.
To learn more about the ways we can protect your interests with respect to alimony and other aspects of divorce, schedule a confidential consultation today.