www.taxprofessionals.com - TaxProfessionals.com
Posted by

Alimony Income & How to Report it

Alimony Income & How to Report it

The rules for filing alimony income on your tax return changed with the 2019 fiscal year. Alimony income or payments are no longer tax-deductible, and the receipt of alimony is not taxed as income from subsequent divorce from December 31, 2018.

The TCJA removed the alimony deduction from the 2019-2025 tax code for most divorce judgments and settlements entered into during this period. Taxpayers can still assert the deduction and must report payments for most divorces finalized before December 31, 2018.

What is Alimony?

Alimony is the support paid to a spouse or ex-spouse according to a divorce or legal separation decision. It would aid the spouse if they earned much less money than the other spouse during the marriage (or no income). It usually ends if the spouse receiving support remarries or if a court orders them to stop.

Alimony Tax rules before 2019

The previous tax rules still apply if your divorce was enforced or your divorce judgment was issued in 2018 or earlier. In these divorces, the alimony is still considered taxable income for the beneficiary and remains deductible for the payer according to the same rules.

Payors must continue to meet certain requirements for these payments to be considered deductible from alimony.

The new rules also apply if an executive order or agreement is amended after December 31, 2018, and the amendment provides that the revocation of the alimony deduction applies to the amendment.

Does alimony count as income?

Alimony is not considered income for tax purposes. It also does not count as income when determining Medicaid eligibility. Alimony counts as income when you enroll in the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps.

Reporting received alimony as income.

Enter the total amount of alimony you received in the 2nd line of Schedule 1 with the Form 1040 to report the alimony you received as income if you were divorced on the due date. Alimony includes what is sometimes called "the separate maintenance." This is your income if you are legally separated but have not yet been technically divorced. It does not include:

  • Child care

  • Non-monetary property settlement

  • Payments representing community-property revenue

  • Use of payer's assets

  • Voluntary payments not required by the divorce judgment or agreement

The total of Part I, "Additional income" of Schedule 1, is transferred to line 8 of the 2021 Form 1040.

Alimony is considered a non-taxable event. It does not appear on the federal income tax return and cannot be claimed as a tax deduction by the paying parent.

Claiming the alimony, you paid as a deduction.

Enter the total amount you paid on line 19a of Schedule 1 and transfer the total to this section, "Income adjustments," on line 10 of Form 1040. Schedule 1 also asks you to enter the social security number of your ex-spouse and the date of the divorce agreement or decree to confirm that you are still eligible to claim the deduction.

Entering your ex-spouse's social security number (SSN) lets the IRS know who received the money, so the agency can make sure that person reported it as income.

Don't worry if you don't have your ex-spouse's social security number, and they won't give it to you. You can report the issue to the IRS, and your ex can be fined $50 for not providing it.

It is not necessary to itemize to benefit from this alimony deduction. You can claim and itemize other deductions or claim both the alimony deduction and the standard deduction.

Requirements for deducting alimony payment

You can deduct alimony from taxable income if the divorce was finalized before 2019, provided it meets certain requirements and rules:

  • Support must be paid in cash, including a check or money order. Spousal support is not deductible if you give away property or property in lieu of spousal support. The IRS treats this as a property contract.

  • You and your ex-spouse cannot live in the same house when making the payments.

  • You don't have to continue making payments after your ex-spouse dies. Ideally, your divorce decree or separate support agreement should clearly state that.

  • Your divorce decree, separate support order, or written divorce agreement cannot say the payment is anything other than support. The document must clearly state that it is alimony or separate maintenance and not child support or an aspect of property settlement because they do not count as alimony.

Anyone claiming alimony or deducting alimony payments must provide the original divorce or separation agreement date for the fiscal year 2019.

Alimony Recapture Rule

The IRS reserves the right to "recapture" your deductions if it determines that your payments are not considered alimony. The alimony amount you deducted must be added to your income in subsequent tax years when it becomes taxable.

This can happen if the number of your payments drops significantly within a year or two after the divorce or if your alimony payments end in full within three years. It can also happen if payments run out as soon as your youngest child leaves the nursery. The Internal Revenue Service will review your situation to determine if the payments were, in fact, alimony or separate support.

Your payments cannot be reduced by $15,000 or more in the third year compared to the second year, and the payments for the last two years cannot be "significantly reduced" compared to the first year's payment.

No dollar amount is subject to the "significant reduction" rule; it is open to interpretation by the IRS. The idea is to prevent spouses from disguising real estate arrangements as spousal support to claim the deduction. Property contracts are usually concluded within the first three years of divorce.

The IRS makes exceptions for circumstances beyond its control, such as if the court reduces alimony due to an unforeseen financial crisis.

These terms apply more strictly to divorce agreements between spouses than court decisions.