Alimony provides necessary financial support for many people after divorce. However, when faced with paying or receiving alimony, it's important to understand how alimony may affect your taxable income.
You may be wondering if alimony is taxable. Many clients of East Brunswick, NJ, attorney Jeffrey W. Goldblatt are surprised to learn that the simple answer is “yes,” but just who pays the tax on alimony is not so simple.
In order to understand who pays taxes on alimony, it's helpful to understand alimony tax rules and the changes to these rules that went into effect in 2019.
Alimony Tax Rules before 2019
The longstanding alimony tax rules made it so that the ex-spouse paying alimony could deduct the amount of alimony paid from his or her taxable income, thereby not paying taxes on alimony.
The ex-spouse receiving alimony payments would then need to include alimony payments in his or her taxable income. In other words, the ex-spouse receiving alimony payments would be taxed.
This setup often reduced federal tax payments by lowering the taxable income of the ex-spouse paying alimony as that person was typically in a higher tax bracket than the ex-spouse receiving payments. This setup theoretically wouldn't increase the alimony-receiving ex-spouse's tax obligation too much since he or she would likely be in a lower tax bracket.
Alimony Tax Rules Have Changed
At the beginning of 2019, the long-standing alimony tax rules changed in accordance with the Tax Cuts and Jobs Act.
The new rules have made it so that the federal tax liability for alimony is now the responsibility of the alimony-paying ex-spouse, meaning alimony paid must be included in the gross income, and the ex-spouse receiving alimony no longer pays federal taxes on the alimony payments received.
Who Does the New Alimony Tax Rule Changes Apply To?
The new alimony tax rules do not apply to all divorced couples. According to the International Revenue Service (IRS), alimony may be deducted by the payer ex-spouse but needs to be included as income by the recipient ex-spouse if the divorce agreement was executed before 2018.
The IRS makes it clear that in divorces executed after 2018, the recipient ex-spouse no longer pays taxes on alimony and the payee ex-spouse cannot deduct alimony from taxable income. In other words, the alimony-paying ex-spouse must pay taxes on alimony.
Simply put, for couples divorced before the end of 2018, the alimony recipient is taxed. If couples are divorced after 2018, the recipient is not taxed but the alimony-paying ex-spouse is.
State Alimony Tax Rules May Vary
The new alimony tax rules established by the Tax Cuts and Jobs Act applies to federal taxes. Just who pays or doesn't pay state taxes on alimony depends on the state in which state taxes are filed.
Some states follow the new federal alimony tax rules while others have maintained the old rules for newly divorcing couples.
Attorney Jeffrey W. Goldblatt can help those in East Brunswick navigate state and federal alimony tax rules whether they pay alimony or receive it.
Schedule a Consultation
If you need help recovering alimony or need help resolving alimony payments you're behind on, East Brunswick attorney Jeffrey W. Goldblatt is ready to assist you. Please call our law firm at (732) 238-8700 to schedule a private consultation.