There’s a change to the tax code that could impact you.  If your divorce is final after December 31, 2018, then alimony will no longer be deductible in your federal taxes if you are the person paying the alimony.  It will no longer be included in your gross income if you are the person receiving alimony.

Where does the new rule come from?

The Tax Cuts and Jobs Act (TCJA), signed into law in 2017 will end the alimony-payer deduction and the payee’s income inclusion for agreements executed in after 2018.

Is there a “grandfather clause”?

Yes, alimony agreements executed on or before December 31, 2018, are grandfathered in.  Also, if you later modify an agreement that was executed prior to December 31, 2018, then you can choose to stay grandfathered in or adopt the new rule.

How is the new rule different than the old rule?

The old rule was that the alimony was tax deductible and the money paid to the spouse was included in income.  The new rule is that the party paying alimony no longer gets the deduction and the person receiving it now doesn’t have to report those amounts as income.

Does this change California State tax?

No, the new rule relates to federal taxation but not state taxes.  Your California state tax rules will remain the same.

What’s the practical effect of this change?

The general impact is that overall more taxes will likely be paid because previously the payor spouse received a tax break through a reduction of their gross income, and the receiving spouse was at a lower income. For each couple, though, the practical impact of this may vary.  There may be other strategies that can be employed that have tax advantages to both parties, so consult with a Fairfield lawyer to find out the best options for your particular circumstances.