When a couple divorces in Maryland, alimony can play an important role in ensuring financial stability for both spouses. However, both sides need to be aware of the tax implications that come with paying or receiving alimony.
Current and future tax laws can impact how alimony affects your finances. It is important to know how these laws impact your annual tax obligations so you can remain compliant.
Alimony payments are not tax-deductible for the payer
Before the Tax Cuts and Jobs Act took effect in 2019, individuals who paid alimony could deduct the payments from their taxable income. This deduction often reduced the overall tax burden for the paying spouse. However, for divorces finalized on or after January 1, 2019, alimony payments are no longer deductible at the federal level. This means that the spouse making the payments must pay taxes on their full income, including the portion paid as alimony.
The recipient does not pay taxes on alimony received
For divorces finalized before 2019, the spouse receiving alimony had to report it as taxable income. However, under the TCJA, alimony received in divorces finalized after January 1, 2019, is no longer taxable income. This change benefits the recipient because they can use these payments without paying taxes on them.
Maryland state taxes follow federal guidelines
Maryland follows federal tax law regarding alimony. This means that alimony payments are not tax-deductible for the payer at the state level, and recipients do not need to report alimony as taxable income. This alignment simplifies the process of filing taxes, but it is important for both parties to adjust their expectations regarding the financial impact of alimony payments.
Divorces before 2019 are still affected by the old rules
If a divorce concluded before January 1, 2019, alimony payments still fall under the old tax rules. The payer can deduct alimony payments, and the recipient must include the payments as taxable income. Both parties need to ensure they handle their taxes according to the year their divorce became final.
Being unaware of the tax implications of alimony can lead to troubling surprises and financial disruptions. Keep the current rules in mind when tax season rolls around so you can file accurately and compliantly.
