When you're negotiating with your spouse or arguing in court about the level, type, and duration of spousal support (also called "alimony" or "spousal maintenance"), tax issues should never be far from your mind. One of the most frequent questions during divorce negotiations is, "do you pay taxes on alimony?" This article explains the basic rules and significant concerns for each spouse—but you may need some assistance in making decisions about support, as discussed below.
What used to be a simple answer is now a little more complicated. Alimony might be deductible for federal income taxes, but only in certain circumstances. The Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes to how the Internal Revenue Service (IRS) handles the tax implications of support. The TCJA became effective as of January 1, 2019. So couples who are getting divorced now need to understand the law before negotiating a spousal support settlement.
In divorces that were finalized before January 1, 2019, spouses who pay alimony may continue to deduct the full amount on their federal income tax returns, while recipients must report the full amount as income. (This is the opposite of child support, which is neither taxable nor deductible.)
If you're receiving spousal support under a pre-2019 divorce judgment, you need to plan for the tax impact of the income. Unlike an employer, your former spouse won't withhold any taxes from your support check. If you're staying at home to care for young children and have no other source of income, paying estimated tax each quarter (to both the IRS and your state) may be a good way to avoid taking a tax hit at the end of the year. If you have a paying job, then increasing withholding from your paycheck is another way to offset the potential impact of support payments.
Also, you should know the IRS treats payments made to third parties on your behalf as though you received them. So if your former spouse pays the mortgage directly as a form of alimony under your pre-2019 divorce judgment, you must report that amount as income. However, payments related to a jointly owned home aren't fully deductible. That means that if you and your ex continue to own the home together and you pay all the expenses, you are allowed to deduct only half of the mortgage payment as spousal support. But you can take half of the mortgage interest deduction as well.
For all divorces that are finalized after December 31, 2018, the Tax Cuts and Jobs Act permanently eliminated the deduction benefit and reporting requirements for spousal support. In other words, the IRS will treat spousal support payments the same as child support—no deduction or credit for the paying spouse and no reporting requirement for the recipient.
Note that these rules apply only to federal income taxes. States that have their own income taxes may not follow the federal rules. For instance, California still allows deductions on state income tax returns for spousal support payments, and support recipients must report the amounts received as income on their state returns.
You'll need to consider the ramifications of the tax treatment of alimony when you're negotiating a settlement in your divorce. The IRS offers many publications that may help, including IRS Publication 504 (which has a chapter on alimony). But tax issues in divorce can be complicated, especially when you also have to take into account different state rules. So you may want to speak with a family law attorney for advice, to make sure that you fully understand the consequences of any settlement agreement on your future finances.