New Rules for Alimony and Taxes
The Tax Cuts and Jobs Act Eliminates This Rule Beginning in 2019
It used to be that alimony was taxable income to the ex-spouse who received it and it was tax deductible for the payer. But that was then, and this is now.
The Tax Cuts and Jobs Act, signed into law on December 22, 2017, made some significant changes to the alimony deduction. Going forward, alimony payments are no longer deductible—ouch!—nor does the recipient have to report it as income.
The 2018 Tax Law Gives New Meaning to "Tax Planning" and Divorce
The date of your divorce decree or agreement is pivotal under the terms of the Tax Cuts and Jobs Act. If you're divorced in 2018, the old rules still apply. But if your divorce is final on January 2, 2019, they're out the window...unless you specifically modify an earlier decree or divorce agreement to adopt the terms of the TCJA. This would require the mutual consent of both ex-spouses.
You might want to do your best to wrap things up by year's end—specifically, December 31, 2018—if you're going through divorce proceedings and it looks like you're probably going to end up paying alimony. The flip side is that you'll be much better off if the proceedings drag on beyond the first of the year if you're probably going to be receiving alimony,
Talk about tax planning.
Reporting Alimony You've Received
Assuming your divorce is final before the end of 2018, the rules for reporting the income remain unchanged from previous years.
You must enter the full amount of alimony you received for the year on line 11 of Form 1040. For tax purposes, alimony includes what is sometimes called "separate maintenance"—income received if you're legally separated but not technically divorced. It does not include payments received under the terms of a temporary support order that might be in place while your divorce is pending.
You do not have to report any amounts you receive for child support. Child support is considered a non-taxable event. It’s not reported on your federal tax return and the parent paying it cannot claim it as a tax deduction.
An Exception to the Rule
If your ex doesn't claim a deduction for the alimony or separate maintenance paid to you, you don't have to report it as income. The IRS just wants someone to pay taxes on this money. If your ex-spouse isn't doing so, then you have to. If your ex does include it in his taxable income, you're spared from claiming it as income.
Otherwise, your alimony payments contribute to your overall taxable income...at least through 2018. After that, Congress says you can accept it tax-free. That money becomes taxable to the individual who earned it in the first place—your ex.
Reporting Alimony You've Paid
If you paid alimony or separate maintenance to your ex-spouse, report the total amount on line 31(a) of Form 1040, then enter your ex-spouse's Social Security number on Line 31(b). Don't worry if he or she won't give it to you and you can't find it on prior years' jointly-filed returns. You can notify the IRS of the problem and your ex can be charged with a $50 penalty for not supplying it to you.
You can claim alimony paid as an "above the line” deduction on page one of Form 1040, at least through 2018. You don't have to itemize your deductions to claim it. You can claim both the alimony deduction and the standard deduction as well, or you can claim it and itemize other deductions.
Requirements for Deducting Alimony Payments
It probably doesn't come as much of a surprise that deducting alimony you've paid comes with a whole list of requirements and rules.
- You cannot file a joint tax return with your spouse, assuming you’re able to do so because your divorce is not final yet.
- You must pay alimony in cash, which includes checks or money orders. If you give property or an asset in lieu of alimony, it’s not deductible.
- The payment must be received by or on behalf of your spouse or former spouse, such as if your divorce or separate maintenance decree says that you must make her mortgage payments for her as a form of alimony.
- Your divorce decree, separate maintenance decree, or written separation agreement cannot state that the payment is anything other than alimony. In fact, the document should clearly state that it is alimony or separate maintenance, not child support or an aspect of property settlement. Child support and property settlement payments do not count as alimony.
- You and your former spouse cannot live in the same household when you make payments.
- You have no liability to continue making payments after the death of your former spouse. Ideally, your divorce decree or separate maintenance agreement should clearly state this as well.
The Recapture Rule
The Internal Revenue Service reserves the right to “recapture” your deductions if it determines that the payments were actually in the nature of property settlement or child support. This means that the amount of alimony you deducted must be added back to your taxable income in future tax years, at which time it becomes taxable.
This might happen if the amount of your payments drops significantly within one or two years of your divorce, or if your alimony payments end entirely within three years of your divorce. It might also happen if payments end as soon as your youngest child leaves the nest. The IRS will review your situation to determine if the payments were indeed alimony or separate maintenance.
Specifically, your payments cannot decrease by $15,000 or more in the third year compared to what they were in the second year, or the last two years’ payments can’t be “substantially less” than what they were in the first year.
No dollar amount is attached to the “substantially less” rule—it’s open to IRS interpretation. The idea is to prevent spouses from camouflaging property settlements as alimony. Property settlements are often completed within the first three years after divorce.
The IRS makes exceptions for circumstances beyond your control, such as if alimony is modified downward by the court due to an unforeseen financial crisis.
NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.