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Alimony and Taxes

Divorce is never something anyone wants to go through. Still, if you have come to terms with the decision to get divorced, California has laws that help spouses work out their financial matters. Spousal support is awarded to the spouse who stayed home to care for the children or do other house chores. The marriage duration significantly determines the amount, and the period you could receive alimony.

Spousal support dynamics is one of the divorce issues you could face when deciding to end your marriage. Whether or not you are required to pay tax when receiving alimony, you could face challenges since taxes and divorce issues are complicated. If you have questions on taxes and alimony before or after a California divorce, it would be wise to contact a Los Angeles Divorce Lawyer.

Overview of Alimony Law in CA

Often, the court determines the amount and duration of spousal support based on the different factors of the case. If the paying spouse has a significant amount of property or money that is not jointly owned with the receiving one, the court may order a lump sum payment to the other spouse.

A lump-sum fee is beneficial for both parties. This is because the recipient receives a large amount of money at once, and the paying spouse eliminates the need to make regular payments. However, this type of payment eliminates the possibility of modification, even when the circumstances change.

In most cases, the court does not count on the paying spouse to personally make the payments. The court issues an order to withhold the paying spouse's paycheck until the spousal support is deducted. This formula is beneficial unless the paying spouse changes jobs or stops working while avoiding alimony payments.

Types of Spousal Support

When couples separate or divorce, California law could award several forms of spousal support to either spouse. The payment of alimony aims to ensure that both parties are financially supported to maintain the lifestyle they led in marriage. In the past, the paying spouse could deduct alimony from their taxes, and the recipient could claim spousal support as taxable income. However, changes in tax laws change the designation. The common types of alimony include:

1. Temporary Alimony

Temporary spousal support is often paid before completing the divorce process. When you separate and file a divorce in court, you may obtain temporary alimony to cover your daily expenses and the costs of securing a divorce lawyer.

Temporary alimony stops being paid when the court has finalized the divorce. Since temporary alimony is meant to cover personal bills, the marriage duration does not affect the amount you receive.

The law on temporary spousal support ignores the debts that the couple had before their separation. Taxation affects the amount a spouse receives in alimony since it is taken out of the net income. Mortgage payments are relevant to tax write-offs that increase net after cash flow.

2. Permanent Alimony

Permanent alimony is spousal support that is paid by one spouse to another for a long time. Sometimes the court orders this type of support to be paid for a lifetime or with an indefinite ending time. However, even when it is permanent, some situations could prompt the payment to be reduced or eliminated. If you marry again or cohabitate with a new partner, long term spousal support stops.

Courts rarely award permanent alimony. California divorce law reserves this type of support for couples who are ending a long term marriage. Also, if the receiving spouse has made significant contributions to the other spouse's education and career, they can be awarded permanent support. If you seek permanent alimony from your spouse after a divorce, you could significantly benefit from legal guidance.

Alimony and Taxes                                    

The laws concerning spousal support are complicated and have many statutes. Before 2019, the law stated that a person paying alimony was entitled to a tax deduction. Also, the receiving spouse was taxed for the payments since alimony was considered part of their income.

Lawmakers dramatically altered alimony tax directives after the reform law was passed in 2018. For couples who divorced in 2019 moving forward, the tax deduction from alimony was halted. However, federal law deducts a considerable amount of tax from divorced couples, which changes the dynamics of spousal support and taxes.

The change in the taxation of spousal support was put into effect on January 1, 2019. For divorces filed after this date, the paying spouse cannot take an income tax deduction for other payments. Also, the alimony recipient is not required to pay income tax for the payments. The change in taxation laws relating to taxing spousal support has made divorce negotiations more complicated. This will be the case for wealthy couples since they may have greatly benefited from tax deductions related to spousal support.

However, the new rule does not apply to all divorcing couples. Individuals who signed their separation agreement before January 1, 2019, will use the old rile. The alimony payers will take federal tax deductions and do this as long as spousal support payments last. These payments are treated as income for the recipient.

Some people think that the new rule leads to smaller spousal support payments since the larger sum's tax advantages are lost. Alimony tax deductions before the 2019 taxation rule was a strong tool of bargaining in divorce proceedings. However, many people see this advantage as an issue of the past resulting in the new laws.

The new alimony tax rule involves additions and subtractions for recipients of alimony. Fortunately, if you are an alimony recipient, you will not be required to pay tax for spousal support. However, it will be quite complicated to negotiate a reasonable settlement since tax deductions leave very little for you and your ex-spouse. Having to pay tax for alimony would save a few dollars for the divorcing couple under the old rule.

Since lawmakers found it fit to abolish tax deductions on spousal support, some experts suggest that it could be possible to blunt the effects of having no tax on spousal support by paying it from the IRA.

From a tax point of view, a couple who divorced before 2019 is at an advantage. It would help if you were careful when trying to modify the terms of your divorce. It is crucial to avoid losing spousal support tax deductions. Before you decide to change your divorce terms, you need to seek legal advice.

Even when you are using the old alimony tax rule, you will only qualify for alimony deductions after meeting these IRA requirements:

  1. You pay or receive alimony in cash, which could include money orders and checks.
  2. You file Individual tax returns with your ex-spouse. If you file joint tax returns with your former spouse, it will be challenging to qualify for alimony deductions.
  3. Your spousal support payment is not treated like child support or compensation for a property. For you to qualify for an alimony tax deduction in California, it must be clear that the payments made are meant to support a spouse with their daily lives and not treated as child support.
  4. Your separation or divorce agreement clearly states that the amount you are paying or receiving is for spousal support and nothing else.
  5. If you are legally separated while awaiting divorce, you and your ex-spouse should not be living in the same household during payment of the spousal support. You will qualify for an alimony tax deduction if you and your former spouse are not family members when alimony is paid. Also, you will not be allowed to file your tax returns jointly.
  6. You have written instrument requirements. Before your spousal support payments qualify as deductible income, the payment must be made according to a written divorce or separation agreement. This term will include divorce decrees and other separation instruments.
  7. Payment must be made to or on behalf of the spouse or e-spouse. For your spouse support payments to qualify as deductible alimony, the ex-spouse should make the payment. However, if the payment of alimony to attorneys or mortgage lenders is made on behalf of the ex-spouse, the court will allow it to be tax-deductible.
  8. The payee's social security number is required. When an alimony payer wants to claim an alimony deduction for spousal support payment, the payer's return must include the payee's social security number.
  9. No obligation to continue spousal support payments after the recipient's death. Other than payments of delinquent amounts. The obligation to pay alimony is required to stop in case the recipient dies. If the divorce agreement is not clear on matters concerning payment continuation, the state laws should be followed. If the state laws require the payer to continue paying even when the repent dies, the payments will not qualify as alimony deductions. Failure to follow this specification is one of the reasons why divorcing spouses lose spousal support payments.

Divorce proceedings are complicated, especially when joint finances are involved. You may spend a lot of money and time to move through these issues. With guidance from a competent divorce lawyer, you can go through the tax laws that apply to your situation and ensure you make the right decision.

Effects of the New Tax Law on Divorce Payments

The new tax laws for divorced parties are a part of the Tax Cut and Jobs Act, which made some significant changes. When this tax modification was made, the itemized deductions expanded the child tax credit and simplified individual tax returns for many people. After modification of the law, most couples who were divorcing rushed to complete the divorce proceedings. Couples wanted to finalize the divorce before December 31, 2018, the deadline to receive the tax benefits.

If your divorce is not finalized before the deadline, the new law where alimony is not tax-deductible will apply to your divorce. The court must have finalized the proceedings and granted you the divorce. If you made it before the deadline, the old law where the payer lists alimony as a deduction would apply. In such a case, the recipient must list the alimony is deductible income.

If you sell a property while undergoing divorce proceedings, proceeds of the property sale could change your tax capital gains under the new taxation law. However, you can remove the amount you make from your tax returns if you file single.

A credit tax for children within the household of the divorcing couple was imposed. For divorces finalized after the end of 2018, each child under 17 years of age in the taxpayer's household qualifies for a $2,000 deduction. Such an arrangement causes huge tax savings for the custodial parent after a divorce.

After modifying the tax rules, alimony may not be the best type of spousal support for you. You could consider an alternative way to make the payments. Most couples who find the new tax unfavorable for their situation opt for a one-time lump sum payment instead of the monthly alimony.

This arrangement eliminates the tension between you and your soon to be ex-spouse and potentially save tax money and time. Before considering an alternative way of paying alimony, it is crucial to consult with a competent divorce attorney.

Duration of Spousal Support Concerning the New Tax Rule

If looking to receive alimony from your spouse after divorce, you can seek temporary support as soon as the divorce is filed. The temporary support will continue until the court finalizes the divorce process. However, being awarded short time spousal support is not a guarantee that you will receive permanent alimony after the divorce's finalization.

Rehabilitative support continues until the receiving spouse acquires skills required to land a job and support themselves. If you remarry, any amount you will be receiving as alimony from your spouse is reduced. If you are dealing with spousal support in California, it is crucial to seek guidance from a competent divorce lawyer.

Sometimes a spouse can petition the court to change the terms of alimony if there is a significant change in the other spouse's life. This could be the case if the recipient spouse has secured a job and can effectively support themselves. Also, the spouse who is proving support can seek termination if the recipient spouse is not making an effort to find a job.

If you are the recipient spouse, you can seek non-modifiable spousal support. This means that the terms cannot be changed regardless of future happenings. However, this will have to be agreed upon by the involved parties. If you want a flexible future, you can state that alimony will only be modified if:

  • The court orders it
  • The income of the spouse proving support changes significantly
  • One spouse becomes disabled
  • There is an agreement between the ex-spouses

When there is a significant change in circumstances, the court may modify the spousal support. However, the amendment will last until the specific events have been resolved.

Alimony Modifications with the New Taxation Law

If you are currently undergoing a divorce where you will be paying spousal support to your soon to be ex-spouse, you will not be allowed to deduct any of the payments as alimony. For the receiving spouse, they will not treat the spousal support as taxable income. Therefore when taxation is concerned, the new rule on alimony for you and your spouse. Therefore, you should consider this factor when modifying the terms of your agreement.

When you seek to modify the terms of your spousal support in California, you must prove to the court that the circumstances have changed. The recent changes in alimony taxation took place in 2018. However, the rule on modification will also apply to the changes made during the new rule period. If you modified your spousal support terms after January 1, 2018, alimony is included as taxable income for the recipient and deductible to the paying spouse. However, the provisions will not apply for individuals whose divorce is not finalized.

Find a Los Angeles Divorce Lawyer Near Me

Divorce can be quite devastating, especially for couples who have children together. Understanding your rights and entitlement in a divorce could be complicated in California. If you are the alimony recipient, you must have a general understanding of divorce laws.

Taxation concerning spousal support is one of the issues that require the guidance of an attorney to understand during divorce proceedings. At Los Angeles Divorce Lawyer, we are conversant with matters regarding divorce and taxes, and we will answer all your questions and guide you through this situation. Contact us today at 310-695-5212 and allow us to answer all the questions you may have on alimony and taxation.

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