If two spouses get divorced and have a substantial income discrepancy, they may be subject to an alimony order. Until 2019, the individual paying alimony would get a tax break, as they could deduct the payments from their taxes to lower their liability. The spouse receiving alimony would pay taxes on the funds, though that tax rate was generally much lower because of their lower tax bracket.
The Tax Cuts and Jobs Act significantly changed how alimony payments are taxed, effective for divorce agreements after December 31, 2018. It is highly important to discuss the implications of an alimony order with a tax lawyer in San Francisco before you sign an agreement.
Reversing Tax Benefits
Under the new law, the person paying the alimony no longer gets to deduct alimony payments, and the recipient no longer has to claim alimony benefits as taxable income. This reverses who gets the tax benefits from an alimony order. This might make many alimony negotiations more difficult and contentious.
If the recipient is at least 59.5 years old, there may be a method to account for the tax law changes. The payer might be able to transfer retirement funds from an IRA to the recipient’s IRA. This is not taxable to the payor but will be taxable income for the recipient, which makes the situation similar to pre-2019 alimony tax laws.
Contact a Tax Lawyer in San Francisco to Discuss Your Concerns
Tax implications should be considered throughout the divorce process and during any other types of major life changes. Our San Francisco tax attorneys at Diosdi Ching & Liu, LLP assist clients with a wide range of tax-related legal issues, including providing counsel and representation in tax litigation. Call 415.318.3990 or contact us online for help today.