Posted by Rosovich & Associates, Inc.

Alimony and Taxes: Understanding the Rules.

Alimony and Taxes: Understanding the Rules.

Alimony, also known as spousal support, is the money paid to a spouse to another after a divorce. The idea is to help the spouse with the lower income to take care of expenses and maintain a similar standard of living after the divorce. 


Can Alimony be Deductible?

The only condition in which alimony can be tax-deductible is if the divorce place or support was finalized before 01-01-2019. The Tax Cuts and Jobs Act (TCJA) changes also affect alimony payments and how it is taxed. 


The Divorce Date Matters

For divorce finalized before 01-01-2019, the paying spouse could report the funds paid on their tax return as a deduction, while the recipient can report it as an income and pay taxes on it. This, however, will not hold if the support agreement says otherwise. 

Couples whose divorce case has not been finalized by 01-01-2019 will not have the alimony payment classified as income by the receiving party. This also means that the paying party cannot remove the funds as a tax deduction. 


How to Report Income and Submit Tax Deduction for Alimony Created Before 01-01-2019

Provided the parties involved can follow some rules, the paying spouse can deduct the funds paid as alimony when reporting taxes. In the same way, the recipient has to report the payment as income. This, most times, helps both parties save taxes because income is being shifted from a higher to a lower tax bracket through the payment of alimony. The party who earns high will reduce the amount Uncle Sam gets as taxes. Many times, when the recipient receives the money, it does not change their tax bracket. 

Many people prefer to have their alimony payment tax-deductible. However, there is a choice that could result in favorable tax consequences for both parties, provided their income was made nontaxable and non-deductible due to the tax consequence. Consulting a tax expert can guide you in the right direction. 


Ensuring Payments Are Tax-Deductible 

As much as taxpayers would love it, all alimony payments do not qualify as tax deductions. Here are some requirements imposed by Uncle Sam on taxpayers that wish to deduct such payments

  1. Payments Should be in Cash or Check: Alimony payment for a spouse or former spouse should be in cash or check. You cannot deduct the value of an alimony payment in Kind, such as a car's gift.

  2. Note the Document and Specify the payment as tax Deductible: In other words, all payments should be in accordance with your divorce document like the court order, marital settlement agreement, etc. You can also make payment using a temporary support order. The document must, however, state the value of the funds paid as alimony. Also, it should be indicated on the document that the payment is tax-deductible by the paying spouse while the recipient will pay tax on the funds. 

  3. Do not Classify Payment as Part of Property Settlement or Child Support. You cannot deduct child support payment as tax. As a result, one needs to be sure that the payment for alimony is not in any way linked to the support of the kids. For instance, an agreement between the parties involved that the alimony payment will cease when the kid becomes an adult comes with the risk that Uncle Sam might reclassify previous alimony payment as child support, which cannot be deducted. This means that past deductions from alimony will stop while you will be slammed with back taxes. 

  4. Make it Clear that the Recipient's Death Cancels the Payment: The settlement agreement must indicate the payment terminates at the recipient's death or when the paying party dies. Also, if the recipient remarries, the payor can terminate the agreement.

  5. Both parties must live apart: For the separated spouses living together, they cannot deduct the alimony payment. The payment qualifies as tax-deductible after both parties separate physically. 

  6. Parties must not file a joint tax return: if you are filing a joint tax return with your spouse, alimony payment cannot be deducted.

  7. You cannot pay extra Upfront: Uncle Sam has some rules that take care of front-loading – payment of alimony that will be due at a later date. For the first three years after the separation, alimony payment should not be too high.



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