How the New Tax Law Change Affects Alimony
The new California alimony tax law takes away the implications of alimony which basically means that the people paying alimony can no longer write it off from their taxes. Also, people escaping alimony no longer have to pay income tax on that. What used to happen was the person paying alimony had more money than the one receiving it, so they would write off the alimony on their taxes and get a larger protection from the government than the amount that the other side was paying. This meant that the government was potentially getting a lot of money. Now the government has eliminated that so there won’t be any tax consequences to alimony either way.
However, this doesn’t start until next year, 2019, so any new alimony order or judgment that happens this year in 2018 will still be deductible and have taxes paid. The new tax law is only going to apply to alimony orders that start in 2019, so we have a year to work under the old system before we stop using it.
Why the Tax Law Changed
Basically, the government is going to end up with more money. For example, if someone is paying $6,000 a month on alimony, he or she is writing that off as what we call, “top dollar,” which is writing off 40% against the taxes. The person who is receiving the alimony is only maybe paying 25%, so the extra 15% is what the government is getting. They’ve decided to get more tax money so there won’t be a larger write off where this liability situation is going on.
Q: What effect will it have on negotiations for issues like child support and the division of property?
It isn’t going to affect the division of property at all. It does affect child support, but it does not change the amount child support, because it is calculated first and then we go back and calculate alimony. The real change is going to be instead of thinking in gross pre-tax dollars, we’re going to be thinking in net dollars. We’ll consider how much somebody needs and not dealing anymore with giving extra, because it’s going to be taxes paid.
On the other side of the coin, the people paying alimony don’t have the idea that they’re paying this money, but it’s less because they’ll need to write it off. That’s no longer in the equation. We’re really going to be down to real dollars — what someone can afford and what someone needs is always the real question. Just because someone needs a certain amount of money doesn’t mean the other side can afford it. The bottom line is, it’s going to get tougher because the government is going to be taking more taxes out, which means leaving less money for people to negotiate with.
Other Things You Should Know About the New Tax Law
It’s going to change the whole dynamic. In a sense, it’s going to make things simpler, because you’re going to take the system’s consequences out of the equation. It’s all net dollars, and it’s going to make alimony treated similarly to child support. So you’re talking about net dollars out of your pocket. The other thing is it is going to eliminate this idea of family support. To clarify, it used to be that when you had child support and when you had alimony you could combine it together, and you could call it family support and you could write the whole thing off if you were paying, and you would have to pay taxes on the whole amount to try to maximize family portions.
If you were the one receiving, why would you do this for the person paying? They would pay a higher amount of money than just the alimony combined. For example, if alimony is $1,000 and child support is $1,000 and only alimony was a tax write off, instead of paying $2,000, you end up paying $3,000. The other side is paying tax on the whole $3,000, and they’re paying a lot less in taxes than you’re writing off. The extra money gets taken away from the government, and each side is kind of win-win and getting more money. The idea of family support fell out the window because there are no more tax deductions in the equation. In a sense, it’s really going to simplify that. Family support was always a little tricky as far as changing when kids turned 18. They could no longer be able to get child support, so there was a lot of technical rules that had to be followed to make sure that you weren’t going to lose the ability to write off the money.