Is Alimony Taxable in Arizona?

When you’re going through a divorce, many decisions need to be made by the court. As part of your divorce decree or divorce agreement, you may need to make alimony payments or pay child support to your former spouse. If the ink is still fresh on your divorce or separation agreement, you need to be aware of the tax implications to understand how to file your next tax return correctly.

When the Tax Cuts and Jobs Act was passed in 2017, it made a massive change in the way federal tax returns are filed with regard to alimony payments and child support. Alimony payments were once considered tax deductible and as taxable income. However, this is no longer the case. You must discuss your concerns with an experienced divorce attorney as well as a tax professional to ensure you are following the new rules.

The Law Office of Cosmas Onyia is committed to assisting clients with a variety of family law matters, including understanding your tax liability after divorce. In this blog post, we will explore the tax impact of alimony payments in Arizona while providing comprehensive insights and guidance for those navigating divorce agreements.

Understanding Spousal Maintenance or Alimony Payments

Spousal maintenance or alimony is a form of spousal support paid by one spouse to the other during a divorce or separation agreement. The court may decide that alimony is required to ensure that each spouse can continue to maintain similar standards of living even after the divorce or separation.

Spousal support is intended to help the spouse that earns less move forward toward financial independence. Since the recent changes to the tax laws, both the paying spouse and receiving spouse need to be aware of how spousal support can impact their taxes.

Tax Implications for Arizona Alimony Payments 

Alimony was previously tax deductible for alimony payers and taxable income for the person receiving it. These changes to tax laws went into effect for all divorce proceedings that were executed after December 31, 2018. 

When it comes to spousal maintenance, here is what you must know for tax purposes.

Alimony Payments Are Not Taxable Income 

If you are the recipient of alimony, you are no longer required to report alimony as part of your taxable income. This means your financial support ordered by the courts can be alimony received in the total amount rather than be considered taxable income that is subject to tax on your federal tax return.

Alimony Payments Are Not Not Tax Deductible

Unfortunately, if you are the one paying the alimony, it is no longer considered tax deductible after the action of this new law. If you have yet to sign a divorce or separation agreement, this change may make you hesitant to agree to alimony. It can be beneficial to discuss the tax consequences of alimony and what it means for you with an experienced attorney in family law matters. 

If your alimony agreement was executed prior to 2019, these tax consequences will not apply. However, if you made modifications to your divorce or separation agreement, it will most likely be affected when it comes to taxes.

Tax Implications for Child Support in Arizona

When children are involved, divorce or separation agreements typically include child support paid by the noncustodial parent. In Arizona, child support is affected only by state laws rather than federal laws, which means its treatment for tax purposes is different from alimony.

You should know that child support is not tax deductible for IRS purposes. It considers child support as an obligation that the non-custodial parent must uphold. Likewise, if you are receiving child support, you do not have to pay taxes on it as taxable income. The nature of child support is to provide finances for caring for the children of this former marriage. 

How Else Are Family Law Cases Affected by the New Internal Revenue Code?

Alimony cannot be used to offset capital gains tax, but the capital gains tax exclusion may apply to the home you shared. This will depend on the property settlement agreement that was established during the divorce. Division of property isn’t considered a taxable event, though it may have a tax basis that needs to be addressed. 

Additionally, when facing a divorce and alimony, it is vital to know that it will not be considered alimony if you do not pay the custodial parent with cash, check, or money order. The courts do not recognize non-cash forms of payment for income tax purposes.

While tax benefits have undergone significant changes, one thing that has not changed one bit is the confusion that taxes create. When divorce is added into the equation, taxes and the required payments should be fully understood by all parties to avoid issues with the IRS down the road.

If you struggle to understand what adjusted gross income means, how mortgage interest affects capital gains in the same household and different households, are under self-employment, or do not know what impact the recapture rule will have on you as you prepare for divorce, it is essential to speak with a professional about your taxes as well as an attorney. The combined experience of these respective professionals can provide the guidance you need to understand these payments and how they relate to your tax situation.

Getting the Legal Assistance You Need for Divorce in Arizona

Previously, you could show an itemized deduction on your taxes to deduct alimony payments and get a lower tax bill. Now, when payments are considered alimony, you no longer get to deduct them for tax time. 

Along with the new laws for payments and changes to what the law requires for tax, the process of divorce is far more complicated and confusing than it has ever been. You likely have many questions about your divorce, to begin with, and throwing tax into the mix with your father’s rights and other issues is enough to make your head spin.

You will want to be accurate and prompt on your payments, as well as make sure you’re doing the right thing when it comes to taxes. Otherwise, you may face severe consequences from the family court as well as the IRS, respectively. Getting assistance with spousal support payments can help you follow the right path and avoid stressful complications.

It is easy enough to make mistakes on tax forms, and when you do, you may be hit with fees and payments by the IRS. That’s not exactly what you need to move forward after the finalization of your divorce. Whether you’re the one making these payments or you need to receive them, the Law Office of Cosmas Onyia is committed to assisting you with family law matters, including divorce, alimony, spousal support, child custody and child support, property division, and in cases that involve domestic violence and restraining orders.

You can schedule a free consultation that will help you learn more about these obligations and requirements under the law. You’ll also be able to learn about your legal options and how to protect your legal rights best when you are getting divorced or separated in Arizona.