The process of getting divorced can be a draining experience — emotionally, mentally and financially. While California residents are obligated to approach property and asset division in a certain manner, other issues such as alimony may be more difficult to agree to, especially in a contested divorce. Now, due to an upcoming change in the tax codes, alimony discussions may become even more contentious.
The current tax laws may have made paying alimony a little less painful due to the fact that the paying spouse was permitted to deduct the amount from his or her income before taxes were assessed. This could potentially lead to significant tax savings. The one ordered to pay is typically in a higher income and tax bracket, therefore a monthly payment in the amount of $10,000 could have allowed the payer to deduct an estimated 50 percent before taxes.
Furthermore, the spouse who received these payments was obligated to report these monies as taxable income. However, due to usually being in a lower income and tax bracket, the recipient may have only paid taxes on $7,000, leaving him or her to count more than $2,000 as tax-free income above the ex-spouse’s net income expenses. The proposed changes would completely flip this code. The paying former spouse would no longer be permitted to deduct the payments, and the recipient would receive all monies as tax-free. In the end, though, this could potentially harm both parties, as the recipient could also see a reduction in payments.
There are other purposed changes that could negatively impact a divorcing couple. These include the reduction in mortgage interest, and not allowing deductions for second homes or vacation properties. There are also reductions planned for property tax deductions and changes in reverse mortgages, which could harm older divorced spouses. California residents who are headed for a divorce, and are questioning how the changes in the alimony tax codes will impact them financially, may choose to seek the assistance of an experienced family law professional.
Source: investmentnews.com, “GOP tax plan creates surprise divorce penalty”, Mary Beth Franklin, Nov. 6, 2017