Alimony, also called spousal support or spousal maintenance, is the payment of money by one spouse to the other after separation or divorce. Its purpose is to help the lower-earning spouse cover expenses and maintain the same standard of living after divorce.
Alimony may be tax-deductible, but only if you finalized your divorce or support agreement before January 1, 2019. On December 22, 2017, the President signed sweeping tax legislation into law. The Tax Cuts and Jobs Act (TCJA) is the most significant tax reform in the United States since in decades, and the changes significantly altered spousal support (alimony) taxes for both spouses.
If you finalized your divorce before January 1, 2019, the spouse paying support may report the payments as a tax deduction, and the recipient must report and pay taxes on the alimony as income (unless your support agreement or order says otherwise). For couples whose divorce was pending on or after January 1, 2019, the Internal Revenue Service (IRS) no longer treats spousal support payments as income to the spouse who receives it, nor does it allow the paying spouse to take a tax deduction for the amount of alimony paid each year.
If spouses follow certain rules, the IRS allows the paying spouse an alimony deduction for tax reporting purposes. In turn, the recipient must report the alimony payments as income. In many cases, this results in tax savings for both spouses—they are shifting income from a higher to a lower tax bracket by transferring alimony from the higher-earning spouse to the lower-earning one. The high earner saves money that would otherwise go to the IRS. The recipient's tax bracket doesn't usually change as a result of the alimony payments, and the payor is sometimes more generous because of the tax savings.
Example. If the higher earner has a taxable income of $200,000 a year and pays the other spouse alimony of $80,000 a year, the higher earner will owe income tax on $120,000, not $200,000. The recipient might pay taxes of $16,000 on the $80,000. The payor saves more than that. The payor, who would have paid about $50,000 on $200,000 of income, now pays only about $24,000 on annual income of $120,000. Between the two, they are paying a total of $40,000, or $10,000 less, than the higher earner would have paid before deducting the alimony payments.
Most people want to make alimony tax-deductible. You do, however, have a choice, and for some couples, the tax consequences are more favorable if they make payments nondeductible and nontaxable because of the tax consequences. A tax expert can tell you which course is right for you.
However, not all alimony payments qualify as deductions. The IRS imposes seven requirements on taxpayers seeking to deduct alimony payments:
You can deduct the amount of alimony payments even if you don't itemize deductions on your income tax return. Use the standard income tax return, IRS Form 1040, to claim the deduction. You can't use the simpler Form 1040EZ or Form 1040A. You'll need to provide your former spouse's social security number.
Regardless of when you filed for divorce if a judge finalized it on or after January 1, 2019, the Tax Cuts and Jobs Act (TCJA) will impact your spousal support orders. The TCJA ended the tax deduction benefit and reporting requirements for support until at least 2025 (or, after 2025 until Congress changes the law.) The IRS now treats all alimony payments the same as child support—meaning, there's no deduction or credit for the paying spouse and no income reporting requirement for the recipient.
Divorce is an adversarial process already, and the new tax changes are likely to cause more issues moving forward. In the past, paying spouses were less likely to fight over spousal support payments because that spouse would receive a credit for any money paid to the recipient, and the recipient would pay taxes on the income. Now, however, paying spouses often feel as though the new law rewards the recipient spouse with a financial windfall—large, monthly payments that don't count as income.
For example, if a paying spouse earns $60,000 per year and the recipient earns $40,000 per year, the court may order spousal support payments to balance out each spouse's finances. If the paying spouse sends the recipient a total of $10,000 per year in alimony, the result is that both spouses receive a total of $50,000 per year. In the past, the paying spouse would ask the IRS for a tax deduction for the $10,000 paid while the recipient would report and pay taxes on the income.
Under the new tax law, the paying spouse is still responsible for paying taxes on the full $60,000 (even though that spouse is keeping only $50,000), and the recipient only pays taxes on the $40,000 earned (despite receiving an additional $10,000 in income.) As a result of the new tax law, paying spouses will likely negotiate to pay less in spousal support to make up for the loss of the tax deduction and "windfall" for the recipient not reporting the income.
If you're going through a divorce and alimony is an issue, it's important to speak with an experienced family law or tax law attorney before you settle or ask the court to decide the alimony issue for you. Paying spouses must evaluate the impact of paying spousal support on their annual income and how the payments will impact the recipient.