According to the IRS, alimony or separation payments paid to a spouse or former spouse under a divorce or separation agreement. These include a divorce decree, a separate maintenance decree, or a written separation agreement, may be alimony for federal tax purposes. Alimony or separation payments are deductible if the taxpayer is the payer’s spouse. Receiving spouses must include the alimony or separation payments in their income.
Beginning January 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after December 31, 2018.
This applies to a divorce or separation agreement executed on or before December 31, 2018, and modified after December 31, 2018, as long as the modification:
- Changes the terms of the alimony or separate maintenance payments; and
- States that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
On the other hand, alimony or separate maintenance payments are typically deductible from the income of the payer spouse and includable in the income of the receiving spouse if made under a divorce or separation agreement executed on or before December 31, 2018.
This is true even if the agreement was modified after December 31, 2018, so long as the modification is not one described above.
How Does the IRS Define Alimony Payments?
To qualify as alimony or separate maintenance, the payments you make to your former spouse must meet all six of these criteria:
- You did not file a joint tax return with your former spouse;
- You make payments in cash, by check, or by money order;
- You make payments to or for a spouse or former spouse under an applicable divorce or legal separation agreement;
- Legally separated spouses cannot be part of the same household when making payments;
- Liability for the payment does not extend beyond the death of the spouse who receives payments;
- The payment is not child support or a property settlement; and
- Some divorce payments are not considered alimony.
Moreover, when the IRS defines alimony, it specifically excludes certain payments as not qualifying for alimony or separate maintenance treatment. These include:
- Child support;
- Non-cash property settlements;
- Payments to keep up the property of the alimony payer;
- Payments for the use of the alimony payer’s property;
- Voluntary payments that are not required under a divorce decree or separation agreement; and
- If a person paying alimony must also pay child support, but they do not fully complete the payment for both, payments would go toward child support first for tax purposes.
Furthermore, if you reside in one of the states listed below, consider any property or income held by you and your spouse as community property. Payments that represent your spouse’s portion of community property income are not considered alimony in these states:
- Arizona;
- California;
- Idaho;
- Louisiana;
- Nevada;
- New Mexico;
- Wisconsin;
- Washington; and
- Texas.
Therefore, you must research the tax regulations in your state to determine what you need to file for alimony.
How to Report Alimony on Your Tax Return?
There are ways to reduce your taxes during a divorce. For instance, if you are going through a divorce, planning the divorce separation agreement can help you save money on taxes in the future. While alimony is no longer reportable as a deduction or income, other tax impacts could affect your future tax returns.
Additionally, claiming a dependent on your tax return depends on many factors. The custodial parent will generally claim the dependent, but the custodial parent for tax purposes might not be the same person with legal custody. The custodial parent for IRS purposes is the parent whose house the child sleeps at the most number of nights during a year.
In certain cases, the non-custodial parent may claim the dependent if they meet the following four requirements:
- The parents are divorced or legally separated under a decree of divorce or separate maintenance;
- The parents have been living apart at all times during the final six months of the year;
- The child in question received over 50% of their support during the year from their parents; and
- The child is in the custody of one or both parents for more than 50% of the year.
The custodial parent needs to sign the necessary forms declaring that they will not claim the child as a dependent for the year. Additionally, the non-custodial parent can attach the written declaration to their return for divorces occurring after 1984. Even if a non-custodial parent can claim the dependent on their tax return, claiming the child will not provide any advantage for certain tax benefits of the non-custodial parent.
These include:
- Head of household filing status;
- Child and dependent care expenses credit;
- Earned Income Tax Credit;
- Health Coverage Tax credit;
- Exclusion for dependent care benefits; and
- Choosing assets carefully.
Furthermore, dividing assets during a divorce does not necessarily result in a taxable event. You do not have to pay taxes on gains or losses at the time of the divorce. But, if you receive an asset in a divorce and want to sell the asset at a gain in the future, you will have to pay the tax due on the whole appreciation amount, not just on the amount of appreciation that has happened since the divorce.
For this reason, it is crucial to choose the assets you want in divorce thoughtfully. For instance, receiving cash from a bank account does not result in a gain or loss. However, accepting $75,000 of stock with a $25,000 basis, means you would also be taking a $50,000 profit that later would likely be taxed. Choosing $75,000 of cash over the stock would be a more efficient tax choice. Keep in mind that most divorce lawyers are aware of these tax impacts. They will factor the tax consequences in the terms of divorce agreements.
What is the Difference Between Child Support and Alimony Taxes?
There are some key differences between child support and alimony taxes. A person making qualified alimony payments can deduct them. Alimony payments received by the former spouse are taxable and you must include them in your income as mentioned earlier. However, in regards to child support, the payor cannot deduct it and payments are tax-free to the recipient.
Furthermore, to qualify for the alimony deduction, you must make the payment in cash, not property. A spouse or someone for the spouse must receive the payment under a divorce or separation instrument. The agreement cannot specifically exclude the payment from being either of these:
- Included in the recipient’s income;
- Deducted by the payor spouse; and
- The spouses cannot be members of the same household when the payment is made if divorced or legally separated.
It is important to note that the liability for payments must end upon the death of either spouse. The amount you pay might depend on the life event of a child. If so, you cannot claim the payment or the portion affected by the event as alimony. The law permits the recapture of certain alimony deductions. This ensures that large payments are not being treated as deductible alimony in the first few years after a divorce. Instead, they can be treated as a nondeductible property settlement.
You are subject to the recapture rule in the third year if either of these applies:
- The alimony you pay in the second and third years decreases significantly from what you pay in the first year;
- The alimony you pay in the third year decreases by more than $15,000 from the second year; and
- Your former spouse might die or remarry. If either occurs, you do have to worry about recapture if payments stop in the second or third year.
When Do I Need to Contact a Lawyer?
Taxing alimony or child support is complicated. Therefore, if you are struggling with these issues, it is recommended that you seek out a local family law attorney to assist you with this.
