How is Alimony Taxed or Deducted?
Divorce comes with a whole host of financial considerations. Property divisions and alimony are two of the most important financial aspects in a divorce proceeding. These two issues will affect the quality of life of both parties immediately, and many times, for years after the divorce is final. Our Las Vegas divorce lawyers typically find that clients are aware of some of the financial implications of divorce but are surprised to learn about others. In this article, we discuss one question that commonly arises in a divorce: How is alimony taxed or deducted? Continue reading for the answers to these important questions.
Note: The content of this article is not meant to be specific legal or tax advice. You should always seek the counsel of your own divorce lawyer and tax professional based on your individual circumstances.
What is Alimony?
Alimony is a cash payment, or more commonly, a set of cash payments over time, from one ex-spouse to the other. Alimony differs from spousal support in that alimony occurs after the divorce is final. Spousal support typically is a temporary financial arrangement that occurs during the divorce proceeding.
There are no guarantees that alimony will be agreed to or awarded in a divorce case. Each set of financial circumstances is unique. There are, however, certain factors that usually affect whether alimony is part of a divorce matter. These include, but are not limited to, the length of the marriage, the financial condition of each party after divorce, and the educational level and earning capacity of each ex-spouse – to name just a few.
Alimony is one of the most complex issues in a divorce matter. You should always consult with an experienced divorce lawyer on any alimony claim. So if alimony is awarded, does the alimony recipient have to pay income tax? Does the alimony payer get a tax deduction?
Changes to the Federal Tax Law in 2019
For many years, alimony was federally tax-deductible to the payor and taxable as income to the payee. This arrangement made sense: Wealthier spouses were encouraged to agree to a more substantial alimony payment because they knew that the payments would be tax-deductible on their federal income tax return. Alimony recipients, in turn, relied on alimony as their source of income and it was taxable just like any other form of income.
In 2017, the federal government enacted the Tax Cuts and Jobs Act (TCJA). One of the principal effects of the TCJA for divorcing spouses concerns alimony. Essentially, the new law shifts the tax burden from the recipient to the payor. The new law also applies to alimony agreements entered into before 2019 but modified after the TCJA’s effective date.
The TCJA completely and permanently eliminates the federal tax deduction for alimony payors, for anyone who gets divorced after January 1, 2019. Recipients of alimony, in turn, no longer report alimony as taxable income. This results in more total income tax to the federal government as the payor is typically in a higher tax bracket than the recipient. It also provides an incentive for wealthier spouses to fight tooth and nail to reduce their alimony obligation.
Nevada State Tax Law
Nevada is one of nine states that have no income tax. The others are Alaska, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Since there is no income tax in Nevada, neither ex-spouse has any state tax penalty or advantage regarding alimony payments.
Trusted Advice and Legal Representation Concerning Alimony
Our seasoned divorce lawyers in Las Vegas are ready to lead you through all aspects of your divorce case. We will provide you with an accurate assessment of your alimony situation. We will also make sure that you fully understand the tax implications of any alimony claim. Divorce attorneys Jennifer V. Abrams and Vincent Mayo offer courtesy phone consultations at no charge. Call 702-222-4021 to speak with one of them about your important divorce matter concerns.
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