Many California residents are likely pretty happy that tax season is over. While some people receive a refund, others may have had to pay taxes to the federal government or to the state. Following tax season, it can be easy for people to forget about taxes completely. However, when California residents are in the process of getting a divorce, they need to carefully consider the tax implications of the decisions they make during the process.
For example, whether or not a spouse gets or pays alimony can make a big difference on their tax liability. In general, alimony is payment from one former spouse to another. It helps the receiving spouses get back on their feet following a divorce and helps spouse maintain the lifestyle they had during the marriage. Couples can agree to alimony, or the court may award it based on several factors including the length of the marriage and each spouse’s earning capacity.
While these monthly payments may seem like a burden to the spouse that has to pay, alimony can be deducted from a person’s tax liability. Additionally, the spouse that receives alimony must pay taxes on the amount received. These tax implications are important to keep in mind as spouses split property and come to other property division arrangements during a divorce.
Some people may try to call payments between former spouses something else in order to avoid tax liability. However, this often can backfire. The IRS will look at a series of factors in order to determine if a payment is alimony or not. These factors include whether the payments end at death or are contingent upon a child. If the factors are met, the tax implications will apply — no matter what the couple has agreed.
Tax implications are just one of many issues that can arise with alimony. People should make sure to explore this issue, and others, during their divorce to ensure their future financial security.
Source: Forbes, “Alimony That Does Not Look Like Alimony,” Peter J. Reilly, April 30, 2014