No one wants to have to pay more taxes than they need to. Come April each year, it’s tempting to try to take deductions that you may not strictly be eligible for. That’s just what happened with Jacob and Evelyn Berger, a California couple whose case rose all the way to the United States Tax Court this year. The Bergers deducted alimony expenses on their taxes, which was not a problem at the time. The issue was that neither of them was ordered to pay alimony – they were paying their daughter’s obligations.
The Bergers’ daughter, Merav Berger, divorced her husband in Israel and moved her two children to the United States. Merav was required to pay for her two children to visit their father in Israel and pay the father and three guests to visit the U.S. According to Israeli law, Jacob and Evelyn were held responsible for these payments as well.
Jacob and Evelyn upheld their responsibility and paid for all of the appropriate visits. The mistake they made was writing off those expenses like alimony payments. The IRS detected this and other tax irregularities and requested that they pay the missing amounts. While the Bergers petitioned to have the deficiencies redetermined, the court found that “A deduction for alimony under section 215 is permitted only to the obligor spouse” and that no one else may claim it. Basically, while the Bergers may have been paying for travel as required by Israel, only Merav would have been able to deduct those expenses from her taxes.
That’s not the only situation in which these deductions can cause you trouble. Keep reading to learn how California and federal tax law interact and when you can (and can’t) use alimony to lower your tax bill.
The Law Surrounding Alimony Deductions
Spousal support orders make your finances more complicated whether you’re receiving or paying the money. It’s only gotten more complicated in the past few years, too. Why? Because California and federal law regarding alimony deductions no longer line up.
The Berger case was resolved in July of 2021, but the case began in 2018. As a result, it wasn’t subject to the 2019 federal tax law change regarding spousal support payments. Before 2019, both California and federal law allowed the spouse paying alimony to deduct the expense from their taxes, while the recipient needed to report those funds on their taxes. This took into account the fact that the paying spouse saw none of the funds while the receiving spouse could count on them as income.
As of January 1st, 2019, the payments of any newly-produced or altered spousal support order are no longer tax-deductible at the federal level. Anyone whose divorce was finalized or whose spousal support order was altered on or after January 1st, 2019, is affected.
This change has two effects. First, the partner ordered to pay spousal support can no longer deduct these payments on their taxes. Second, the receiving partner doesn’t need to report the funds on their taxes at all. The change was part of the Tax Cuts and Jobs Act, designed to cut the taxes paid by these recipients.
However, California law did not change. Today, you may deduct spousal support payments you make from your state taxes but not from your federal taxes. Meanwhile, your partner must report the funds on their state taxes but not their federal ones.
So Who Can Deduct Alimony?
Like the Bergers found out, only a very specific group of people can deduct alimony from any taxes at all. In California, only the person ordered to pay spousal support may deduct the ordered funds and only from their state taxes.
If you haven’t been ordered to pay alimony, you cannot deduct it, period. This remains true if you’re:
- The parent of the obligor spouse
- The child of the obligor spouse
- A friend or other family member
The single exception is if you’ve married someone subject to a spousal support order. If you file taxes with your new spouse, you can deduct the alimony payments from your joint taxes. This is because married couples are considered to have joint finances. However, if you file separately, only your spouse may deduct the funds, and you may not deduct them as well.
What to Do If You Can’t Deduct Alimony
If you can’t deduct your spousal support payments as you’d hoped, you’re not out of luck. You have a few other solutions based on your situation.
First, if you’re the party who’s been ordered to pay support, you can work to renegotiate your divorce agreement. It isn’t supposed to be an undue burden on the paying spouse. Suppose the combination of having to pay alimony and report that money on your own taxes is straining your finances. In that case, you can petition to have the ordered amount lowered. You still won’t be able to deduct the payments, but you’ll keep more of your income.
Second, if you’re helping someone else pay their alimony, you can’t deduct those funds. Since you’re not ordered to pay anything, you’re just giving the obligor a gift. However, you can take care to structure the gifts safely and avoid the federal gift tax. You can give an individual up to $15,000 per year before the recipient must pay taxes on the funds.
Take Control of Your Finances
There’s no doubt that the 2019 alimony tax law change puts a lot of pressure on the paying spouse. California still allows state residents to deduct their alimony payments, but that doesn’t relieve the burden of federal taxes. If you’re obliged to pay both alimony and taxes on that money, you’re probably facing a tight financial squeeze.
That’s why you should reach out to a qualified divorce attorney to renegotiate your spousal support order. You shouldn’t be suffering to support your ex-partner. The right attorney will help you navigate the complexities of petitioning for a new order and help you escape the financial burden you’re under. Reach out today for your free consultation.