Prior to January 1, 2019, the federal tax landscape in the United States looked very different from what it looks like today, specifically, tax law regarding alimony.
Federal tax law and California tax law regarding alimony were identical. The party paying alimony was permitted to deduct these payments on their tax returns. The party receiving alimony was obligated to report payments as income on their tax returns.
However, effective January 1, 2019, federal tax law on alimony changed in a way that would reshape certain aspects of divorce negotiations.
Current tax law and alimony
Federal tax law changed effective January 1, 2019. Now, the party paying alimony is not permitted to deduct these payments on their federal income tax returns and the party receiving alimony is not obligated to report the payments as income on their federal income tax returns.
However, California tax law did not change. The party paying alimony in California deducts these payments on their state income tax returns. The party receiving alimony is obligated to report the payments as income on their state income tax returns.
Negotiating alimony
So, as of 2019, parties receiving alimony in California gain a benefit on their federal income taxes, whereas they do not gain the same benefit on their state income taxes. Conversely, parties paying alimony receive a benefit on their state income taxes, whereas they do not gain the same benefit on their federal income taxes.
The entire process is complicated and makes divorce negotiations regarding alimony more complex. For example, tax benefits may be a factor if spouses are negotiating the trade of marital assets in exchange for non-payment of alimony. These negotiations can affect both spouses’ futures for years to come and should be handled delicately.