Alimony is no longer taxable at the federal level. State rules vary on whether alimony is taxable. Some older alimony agreements may be subject to different rules.
Is alimony taxable income?
Alimony is no longer subject to federal income tax. It was taxable before the Tax Cuts and Jobs Act of 2018.
Because alimony is not taxable to the spouse receiving it, the payor spouse can’t claim a deduction for alimony payments.
The reason for the change in the law is that alimony is considered a form of spousal support. Support between spouses during a marriage isn’t taxable, and alimony is intended to maintain the financial status quo after a marriage ends.
Some older divorce and separation agreements have alimony payments that are taxable to the recipient spouse and give an alimony deduction to the payor spouse. These include:
- Divorce or separation instruments finalized on or before December 31, 2018.
- Some modifications to agreements originally finalized or before December 31, 2018. The agreement should state whether the current tax law applies or the agreement remains grandfathered into the old law.
Do states tax alimony?
States do not have to follow the federal tax rules for alimony.
For example, California didn’t adopt the 2018 tax law change. California income tax still applies to spousal support payments. The spouse making the payments can claim a California deduction.
Massachusetts is another state that kept the old federal alimony rules in place. It taxes alimony payments and allows a deduction for the spouse making the payments.
States may also have slight differences in how they calculate alimony income and deductions. They can also vary on how they handle divorces from before the last tax law changes.
Ask your tax advisor for the current rules in your state based on your specific situation.
What happens if you move states?
Spousal maintenance is something you consider when figuring out how to file taxes when moving to a new state.
Each state can make its own tax laws. One state can’t tell another state that it can’t tax income.
So if you move from a state where you didn’t have to pay taxes on alimony, it’s possible that you could have to start paying taxes on alimony when you move to a new state.
The same thing applies to alimony deductions. Whether you get a deduction usually depends on the state you currently live in.
How to Avoid Paying Taxes on Alimony
Most people no longer have to worry about paying federal taxes on alimony.
If you have an old alimony agreement that is subject to federal taxes, you’ll have to convince your spouse to modify your divorce agreement. Since your spouse would then lose his or her tax deduction, you may have to negotiate.
If you want to avoid paying state taxes on alimony, there are usually two steps you may need to take:
- Finalize your divorce judgment in a state that doesn’t tax alimony
- Make sure that you’re a tax resident of a state that doesn’t tax alimony (and that you won’t be subject to part-year resident taxes of a state that does tax alimony)
Where you can finalize your divorce is a matter of divorce law. Talk to a divorce lawyer to learn more about your options.