The Rules of Alimony and Taxes
Until 2019, the IRS allowed those paying alimony to be part of tax deductions and required it to be reported as income. However, for any divorce finalized on or after January 1st, 2019, the rules have become more stringent. Alimony is the payment of money by one spouse to another following divorce. The purpose is to aid the lower-earning spouse to maintain their same standard of living. This legal situation brings up countless questions about how alimony impacts taxes.
Is Alimony Tax Deductible?
On December 22nd, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) which was the most significant tax reform in decades and significantly changed spousal financial support taxes. Finalizing a divorce before January 1st, 2019 allowed the spouse paying support to report the payments as part of their tax deductions and the recipient paying taxes on the alimony. For those with divorces on or after January 1st, 2019, the IRS does not treat these payments as income to the recipient and the paying spouse cannot take a tax deduction unless they meet certain criteria.
Seven Rules of Alimony and Taxes
The IRS enforces seven requirements for those seeking alimony payments as a deduction. These include:
One: Cash or Check Payments
All alimony payments must be in the form of cash or check to benefit the recipient. For instance, the payer cannot give their car to the payee as a form of payment.
Two: Designate Payments as Tax-Deductible
Ensure all payments follow the divorce documentation including a separation agreement, marital settlement, divorce judgment, or court order. Payments for temporary support could also qualify. It is critical to ensure the documents list the amount to be paid and describe it as spousal support, alimony, or spousal maintenance. The documents must also clearly note that the payments are deductible by the payer spouse and taxable by the recipient.
Three: Don’t Characterize Payments as Child Support
Child support payments are never tax-deductible so ensure the alimony payments are not tied into this category. If you agree that the alimony ends when your child becomes an adult, then you risk reclassification of the payments as non-deductible child support. The result will be years of owed back taxes to the government.
Four: Specify Payments End at the Recipient’s Death
Divorce documentation must note that alimony payments end when the recipient passes away. Also, most payers can terminate alimony if the recipient gets remarried.
Five: Live Apart
If you are living with your former spouse, alimony payments cannot be considered deductions. You must make payments following physical separation to qualify as tax-deductible.
Six: Don’t File a Joint Tax Return
You file a joint income tax return as a couple, you cannot deduct alimony.
Seven: Don’t Front-Load Payments
Make sure you follow IRS rules against advanced payment of alimony that is not yet due. These payments should not be front-loaded in the first three years. Excessive payments will be subjected to recapturing or taxed to the payer following the third year.
How to Claim the Deduction
You can deduct alimony payments if you did not itemize deductions on your return. Instead, use IRS Form 1040, which is the standard income tax form to claim any deductions. Do not use the 1040EZ Form or 1040A Form. As part of the claim, you must provide your former spouse’s social security number.
If you are currently going through a divorce with alimony being an issue, you must speak with a tax law or family law attorney before settling or asking the court to determine the alimony problem with you. Paying spouses must be evaluated to determine the impact based on annual income and how the payments affect the recipient.