Alimony, also known as spousal support, is financial assistance one spouse provides to the other following a divorce or legal separation. Its primary purpose is to help the lower-earning ex-spouse maintain a lifestyle closer to what the couple had during the marriage. Unlike child support, which is intended solely for the care of children, alimony specifically addresses support between ex-spouses.
Tax Law Changes: What You Need to Know
Before 2019, the tax treatment of alimony followed a consistent pattern: the payer could deduct alimony payments from their taxable income, and the recipient had to report those payments as taxable income. This created a tax benefit for the payer and a taxable obligation for the recipient.
However, the Tax Cuts and Jobs Act (TCJA), effective for divorces finalized after December 31, 2018, reversed this arrangement. Now:
- The paying ex-spouse cannot deduct alimony payments.
- The receiving ex-spouse does not include alimony as taxable income.
For divorces finalized before 2019, the earlier tax rules remain unless the divorce agreement has been modified to follow the new rules.
What This Means for You
| Scenario | Divorces Finalized Before 2019 | Divorces Finalized After 2018 |
|---|---|---|
| Payer | Can deduct alimony payments | Cannot deduct alimony payments |
| Recipient | Must report alimony as income | Does not report alimony as income |
Criteria for Payments to Qualify as Alimony
To qualify as alimony for tax purposes under IRS rules, the payments must:
- Be made in cash, check, or money order (not property or services).
- Be required by a divorce or separation agreement.
- Be paid to a spouse or former spouse after legal separation or divorce.
- End at the death of the recipient spouse.
- Not be designated as non-taxable, such as child support or property settlements.
Payments that do not meet these conditions may be considered property settlements or child support and are not subject to the alimony tax rules.
Practical Example
Sarah and Mike divorced in 2020. Mike pays Sarah $1,000 per month in alimony. Since their divorce occurred after 2018, Mike cannot deduct those payments, and Sarah does not declare them as taxable income. Previously, if their divorce had been finalized before 2019, Mike could deduct $12,000 annually, and Sarah would report $12,000 as income.
Who Does This Affect?
- Payers: They must budget for alimony payments with after-tax dollars, as these payments no longer provide a tax deduction.
- Recipients: They benefit by receiving alimony tax-free for divorces finalized after 2018, potentially increasing their net income.
Tips for Managing Alimony and Taxes
- Review Your Divorce Agreement: Determine when your divorce was finalized and understand which tax rules apply to your alimony payments.
- Maintain Detailed Records: Keep copies of divorce agreements, payment receipts, and related documents to verify payments if audited.
- Consider Tax Consequences in Negotiations: When negotiating new divorce agreements or modifications, account for the tax implications of alimony payments.
- Consult a Tax Professional: Specific situations, such as modified agreements or overlapping child support payments, may require expert advice.
Common Confusions and Mistakes
- Mixing Up Alimony with Child Support: Unlike alimony, child support payments are never deductible or considered taxable income. For more details on child support, see our glossary on child support.
- Assuming New Rules Apply to All Divorces: If your divorce was finalized before 2019 and the agreement remains unchanged, the old rules still apply.
- Incorrect Reporting on Tax Returns: Both paying and receiving parties must report alimony correctly to avoid IRS penalties.
Frequently Asked Questions
Q: What if my divorce was before 2019, but we modified the alimony agreement after 2018?
A: Generally, a post-2018 modification that explicitly states alimony is not deductible or taxable will adopt the new tax treatment. Otherwise, the original rules persist.
Q: Is property settlement treated as alimony?
A: No. Property settlements are considered a division of assets and are neither deductible nor taxable as alimony.
Q: Do I have to report alimony payments on my tax return?
A: For divorces before 2019, payers deduct and recipients report alimony. For divorces after 2018, alimony payments typically do not need to be reported.
For more detailed information on alimony and taxes, visit the IRS’s official page on Divorce or Separation and Your Taxes.
Sources:
- IRS Topic No. 452: Alimony Paid. https://www.irs.gov/taxtopics/tc452
- Investopedia: Alimony Tax Deduction Rules. https://www.investopedia.com/terms/a/alimony.asp
- NerdWallet: Alimony and Taxes. https://www.nerdwallet.com/article/taxes/alimony-tax
- Kiplinger: New Tax Rules for Alimony. https://www.kiplinger.com/taxes/alimony
