The Seven Rules of Alimony and Taxes

Until recently, the IRS allowed paying spouses to deduct alimony payments and required recipients to report it as income. However, the rules have changed for any divorce finalized on or after January 1, 2019.

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.

Is Alimony Tax Deductible?

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.

The Date of Divorce Matters

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.

Reporting Income and Submitting Tax Deductions for Spousal Support Orders Created Before January 1, 2019

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.

Making Sure Payments Are Tax-Deductible

However, not all alimony payments qualify as deductions. The IRS imposes seven requirements on taxpayers seeking to deduct alimony payments:

  1. Make payments in cash or by check. You must pay alimony by cash or check for the benefit of a spouse or former spouse. The value of in-kind alimony—for example, giving your spouse your car—isn’t deductible.
  2. Follow the documents and designate payments as tax-deductible. Make payments in accordance with a divorce document, such as a marital settlement agreement, separation agreement, court order, or divorce judgment. Payments made under a temporary support order also qualify. (Section 71 of the Internal Revenue Code.) Just make sure your documents state the amount to be paid and describe it as alimony, spousal support, or spousal maintenance. The documents should also clearly label the payments as deductible by the payor spouse and taxable to the recipient spouse.
  3. Don’t characterize payments as child support or a part of a property settlement. Child support payments, unlike alimony, are never tax-deductible. So be sure that alimony payments are not tied in any way to support of your children. For example, if you agree that alimony will end when your child becomes an adult, you run the risk that the IRS will reclassify past alimony as nondeductible child support. The IRS would disallow your past alimony deductions, and you would owe back taxes. Similarly, if the IRS views your payment as part of your division of marital property, it’s not tax-deductible.
  4. Specify that payments end at the recipient’s death. The marital settlement agreement or judgment must provide that alimony payments terminate when the recipient dies. (The document can also ensure that the alimony obligation ends when the payor dies.) Most payors also have the right to terminate alimony if the recipient remarries.
  5. Live apart. If you are still living with your spouse or former spouse, alimony payments are not tax-deductible. You must make payments after physical separation for them to qualify as tax-deductible.
  6. Don’t file a joint tax return. If you and your spouse file a joint income tax return, you can’t deduct alimony payments.
  7. Don’t pay extra upfront. Make sure to follow IRS rules against front-loading—the advance payment of alimony that’s due later. Alimony should not be excessively high or front-loaded in the first three post-separation years. Excessive payments are subject to recapture or being taxed to the payor in the third post-separation year.

Claiming the Deduction

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.

The Tax Cuts and Jobs Act Impact on Spousal Support Orders on or After January 1, 2019.

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.

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