Is Alimony Taxable in Massachusetts?

When navigating through divorce in Massachusetts, alimony can provide a life raft for financial stability. But specific questions often come up, particularly during tax planning season: Is alimony taxable as income? Are the payments tax deductible for the payor? Well, it’s more complex than a yes or no. 

Federal and state tax laws have changed, and the answer depends on when your divorce agreement was finalized or modified. We’ll try to dive into the details without getting caught in a net of legal or tax jargon.

Alimony Tax Laws

Alimony tax laws went through some notable changes at the federal level not long ago, and after a few years, Massachusetts lawmakers made some adjustments to match the federal rules. It is essential to pay attention to the tax year and date the alimony order was established or modified. 

Before 2019, alimony payments were tax-deductible for the payor and considered taxable income for the recipient at the federal and state level in Massachusetts. a. However,this rule changed at the federal level starting in 2019. From that point on, alimony became tax-neutral for federal tax purposes, although the older rules remained in force for state taxes in Massachusetts for a time. 

In the current climate, if your divorce was finalized on or after January 1, 2019, the person paying alimony cannot deduct those payments from his or hre income on the federal tax return. The person receiving alimony doesn’t need to report payments as taxable income. This can also be true for divorces finalized earlier but modified by a later document. However, that document must specify that repealing the alimony deduction applies to that modification. 

This change in long-standing policies has a significant impact on payors and payees and needs to be taken into account when establishing or modifying alimony orders. 

State Versus Federal Tax Rules on Alimony

Understanding the nuances between state and federal tax rules concerning alimony can be like navigating a maze with two sets of maps because Massachusetts rules were tied to the older, outdated federal years for several years before lawmakers made an update. Starting with the 2022 tax year, Massachusetts began to follow the federal policy that removed the tax implications from alimony. Recipients no longer have to declare taxable income payments, and payors can no longer take a tax deduction. 

Although this change in state law took effect later than the change in federal law, both sets of laws use the same threshold date to determine tax treatment. Divorce decrees executed or modified after December 31, 2018 are subject to the new rules concerning the taxability of alimony.  

If you are filing taxes or amending a return from earlier years, recipients must pay Massachusetts income tax for payments in years before 2022 and must pay federal tax for payments in years before 2019. Similarly, alimony recapture rules no longer apply in Massachusetts starting in 2022. Recapture rules required excess alimony payments that had been deducted to be included in the payor’s gross income. 

Remember that the old tax treatment rules apply for alimony orders entered into before 2019, so alimony is taxable income for the recipient and tax deductible for the payor.  

Alimony Agreements and Modifications

When drafting an alimony agreement, it’s important to consider the tax implications from the start. Knowing how alimony is treated  tax-wise can make a big difference whether you’re the one paying support or the one receiving support. 

If you are considering a modification in alimony and your divorce agreement was executed before 2019, be aware that the modification could have a significant financial impact on both spouses due to tax changes. Calculate the differences and take them into account during negotiations. Also, be certain that your modification order specifies whether repealing the alimony tax deduction applies to your payments. 

Navigating Alimony with Your Massachusetts Divorce Attorney

Alimony and taxes can be complex, so having a guiding hand through the process can be invaluable. At Koiles Pratt Family Law Group, we understand the ins and outs of how alimony is treated tax-wise in Massachusetts. We will steer you through the rough waters of financial uncertainty towards a clearer horizon.

Contact us today at 978-744-7774 to schedule your consultation with our divorce attorney. Let’s navigate these waters together, ensuring you have a reliable compass.