What is an alimony payment? It is a payment between current or former spouses as the result of a marriage, divorce, or ongoing separation. Alimony payments are also called period maintenance payments of a set amount made by one spouse or payer to the other spouse or payee as the result of a legal decree or a court order.
Alimony payments are legal obligations usually made by the higher earning former our current spouse with the higher income to the other or receiving spouse. The details of the actual payment amount is the result of many factors, such as the duration of the marriage and conditions agreed upon by both parties or as a result of a divorce court ruling. For example, a judge could rule that alimony payments do not apply if both spouses' income is or was the same during the marriage. Or, the ruling could set an expiration date on when alimony payments or financial support should be terminated. This decision could be based on the following:
- The paying or receiving spouse dies.
- The receiving spouse marries again.
- The paying spouse can no longer earn an income.
- Children or dependents of the couple no longer require payments to support their life style. Important: direct child support payments are not considered alimony payments.
- The receiving spouse makes no effort to earn income independently.
On the other hand, if the payer spouse refuses to make alimony payments, then the receiving spouse might take this to court. The outcome of that might result in criminal or civil charges for the payer spouse.
The following are the criteria for payments to be considered as alimony payments:
- The divorce or separation document or instrument must state that the payments to be made from one spouse to the other spouse are indeed alimony payments.
- Alimony payments must be made by cash, check or money order.
- The spouses must live apart or in separate locations.
- There is no liability for the paying spouse to continue to make alimony payments after the recipient spouse has died.
- Both spouses must file separate tax returns.
Are Alimony Payments Tax Deductions?
There is no longer a tax deduction for the paying spouse if the divorce agreement was executed after December 31, 2018. If a divorce took place prior to that date, alimony payments are considered a tax deduction for the paying spouse.
Thus, in order to determine whether you can deduct (as alimony payer) or must report (as alimony payee or recipient) alimony payments on your current year tax return, the year in which your divorce or separation agreement was finalized is the deciding factor.
2018 or Any Prior Year Finalized Divorce or Separation Agreement
- Alimony Payer: You as the payer spouse can deduct alimony payments you make to the current or former receiver spouse on the federal and state income tax returns for the tax year you make the payments. The current tax law changes regarding alimony payments do not apply to you on your current year tax return or any tax return before or after, if your divorce or separation agreement was finalized during 2018 or any prior year. Check your divorce or separation agreement for further details. You can claim the alimony payments made as a tax deduction if:
- It is in the form of cash (including checks or money orders)
- It is authorized by a court order for legal separation or divorce
- It is made only when you and your spouse are not members of the same household
- It is terminated upon your receiving spouse's death
- It is proper spousal support, not part of a child support payment or property division
- It is includable in your receiving spouse's taxable income, and
- You and your spouse file separate tax returns.
- Alimony Payee or Recipient: You must report the alimony payments you received from your former spouse as income on the federal and state income tax returns for the tax year you received the payments. The current tax law changes regarding received alimony payments do not apply to you on your current year tax return or any tax return before or after if your divorce or separation agreement was finalized during 2018 or any prior year. Check your divorce or separation agreement for further details. You must report alimony payments received if they were made by the alimony payer to you in any of the forms listed above under the Alimony Payer section. You must enter the social security number (SSN) or individual taxpayer identification number (ITIN) of the spouse or former spouse receiving the payments or your deduction may be disallowed and you may have to pay a $50 penalty.
2019 or Any Later Year Finalized Divorce or Separation Agreement
- Alimony Payer: You cannot deduct your alimony payments you make to your former spouse on the federal and state income tax returns for the tax year you make the payments. The current law changes regarding alimony payments do apply to you on your current year tax return or any tax return after, if your divorce or separation agreement was finalized during 2019 or any later year. Check your divorce or separation agreement for further details.
- Alimony Payee or Recipient: If you are the receiving person of the alimony payments, you are not required to include these payments on your federal income tax return or pay taxes on them, since taxes for these alimony payments are the responsibility of the payer e.g. ex-spouse. Since this only applies to the IRS return, be sure to check the status of alimony and income taxes in your state or territory.
- Note: Some tax advisers have suggested the higher earning spouse or payer award the receiving spouse an individual retirement account or IRA instead of making cash payments. That strategy would essentially be a tax deduction since they (the payer spouse) did not pay taxes on the amounts added to the account.
What happens if you modify a pre-2019 divorce decree of separation agreement?
If you or your ex-spouse wants to revise or modify an existing divorce settlement that was finalized before January 1, 2019, then the new rules will be applied once the new version is finalized. However, there can be specific lines in the agreement which state to abide by pre-2019 laws, but these need to be written and agreed to.
Non Alimony or Separate Maintenance Payments
Essentially, not every payment between spouses under a divorce or separation instrument are alimony or a separate maintenance payment. Alimony or separate maintenance don’t include:
- Non-cash property settlements, whether in a lump-sum or installments
- Payments that are your spouse's part of community property income
- Payments to keep up the payer's spouse property
- Use of the payer's property
- Voluntary payments (that is, payments not required by a divorce or separation instrument)
- Child support payments; child support is not a tax deduction for the payer and isn't considered income for the child or the parent of the child. Additionally, if a divorce or separation instrument provides for alimony and child support, and the payer spouse pays less than the total required, the payments apply to child support first. Only the remaining amount is considered alimony.
In summary, if your divorce or separation agreement was finalized during 2018 or before, alimony payments—paid or received—are permanently grandfathered into the alimony tax rules before the recent tax changes, meaning the old rules apply. If you prepare and e-file your taxes on eFile.com, you don't have to worry about any of this since the software will ask you very simple questions and guide you through the tax preparation.
Child Support versus Alimony
- Child Support Payer: You cannot deduct child support payments you made to your former spouse on your income tax return. Unlike alimony, nothing changes as a result of recent tax reform for child support payments as it relates to your taxes. Child support is for your child or children and is paid to the spouse who lives with the children. Unless your divorce or separation settlement states that the payments can be considered alimony, you cannot deduct child support you paid to your former spouse on your tax return.
- Child Support Payee or Recipient: If you received child support payments, you do not have to report them as income on your tax return since the payments are tax-free, regardless of the year when your divorce or separation agreement was finalized.
Income Tax Examples of Alimony and Child Support Payments
Consider the following situations based on various divorce or separation agreements:
- Jan and Bob's divorce settlement dated July 31, 2018 states that Bob must pay Jan $150 a month ($1,800 a year) as alimony and $200 a month ($2,400 a year) as child support. If he paid the total of both yearly payments ($4,200), he can deduct $1,800 as alimony on his current year tax return and she must report the $1,800 on her current year Tax Return as alimony received. However, if he only paid $3,600 in the current year, $2,400 of that amount is child support. Therefore, he can only deduct $1,200 ($3,600-$2,400) as alimony on his current year Return and she can only report $1,200 as alimony received on her current year return. This is because the settlement was reached prior to the tax reform.
- According to their legal separation agreement dated December 31, 2017, Sue must pay George's dental and medical expenses. Unless the agreement states the payments cannot be claimed as alimony, she can claim a tax deduction on her alimony payments on her current year tax return. He needs to report the alimony he received on his current year tax return and can include them when calculating his deductible medical expenses.
- In October 1984, Bill and Marge executed a written legal separation settlement. In May 1985, a divorce decree replaced their separation settlement. However, the divorce decree did not change the alimony terms in the separation settlement. Therefore, Bill can still deduct his alimony payments on his current year Tax Return since the divorce decree is treated as issued before 1985.
- Mary must pay Michael $8,000 a year in alimony and $4,000 in child support according to their divorce statement dated February 2 of the current tax year. She cannot claim the alimony as a deduction on her current year tax return and he does not need to report the alimony as income on this return. The same applies for the child support payments.
The current tax year IRS Publication 504 on Divorced and Separated Individuals will provide more details. If you have any other questions, contact us for free tax support.
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