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Is Alimony Taxable? Filing Tax Return After Divorce

Is Alimony Taxable? Filing Tax Return After Divorce

When thinking about filing your taxes after a divorce, you might want to know how taxes are going to change. The impact of divorce on federal taxes is not as large as it used to be.

Each of the 50 states has its own income tax laws. The way divorce income and payments are handled from state to state. Check with the state tax administration how state tax laws will affect you, or consult with a tax professional in your state.

Here are the main federal tax areas related to divorce.


Alimony Taxation

The taxation of child support payments on federal income tax returns has recently been changed due to the TCJA. Today, separate child support or alimony payments related to any divorce or separation agreement as of January 1, 2019, are not tax-deductible by the person paying the child support. The person who receives child support does not have to report the child support payments as income.

Prior to changes in the TCJA, child support payments were tax-deductible by the person making the payment. The person who receives child support must report it as income on the federal income tax return.

The TCJA also covers new changes to divorce agreements signed before January 1, 2019. In particular, changes to the original agreement may change the tax impact of pension payments on children's food. If your divorce papers are amended to explicitly specify that the deduction waiver applies to child support payments, the divorce settlement payments will be taxed under the new rules. Without change, child support payments for the agreement entered into before January 1, 2019, are generally deductible from the payer and taxable income from the recipient.


How the IRS defines child support payments

To be eligible for alimony or child support, the payments you make to your ex-spouse must meet the following six criteria:

  • Legally separated spouses cannot be members of the same household at the time of payment.

  • Make payments by cash, check, or order of payment.

  • Make payments for or to a spouse or ex-spouse under an applicable divorce or legal separation agreement.

  • The obligation to pay does not extend beyond the death of the spouse receiving the payments.

  • The payment is not alimony or a property contract.

  • You do not file a joint income tax return with your ex-spouse.

Some divorce payments are not considered child support.

When the IRS defines alimony or child support, it also specifically excludes certain payments that do not qualify for child support or separate maintenance treatment. These include:

  • Food

  • Liquidation of non-monetary properties

  • Payments for retention of alimony payer property 

  • Payments for the use of the child support payer's property

  • Voluntary payments that are not required by a divorce decree or separation agreement.

If a person paying child support also has to pay child support but does not make full payment for both, the payments will go to alimony first for tax purposes.

If you live in one of the below listed states, consider any property or income that you and your spouse own as common property. Payments representing the spouse's share of income held by the community are not considered child support: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.


Where to report alimony on your income tax return

If you made a divorce settlement before January 1, 2019, it's easy to report the support paid and received on your tax return. All you need to do is enter the child support paid or received on Form 1040, Schedule 1.


• If you are the person receiving child support: Enter the amount on line 2a. In line 2b, you must enter the date of the original divorce or separation agreement. You must also provide your SSN to the child support payer. Otherwise, you risk a fine of $50.


• If you are paying child support, enter the amount paid on line 18a. Child support payers must also enter the recipient's social security number on line 18b and the original divorce or separation agreement date on line 18c. Failure to include the beneficiary's social security number could result in a fine of $50.

Individuals with divorce agreements dated January 1, 2019, or later are not required to include information about alimony payments on federal income tax returns.

Suppose you have to report alimony income on your tax return, and you forget to include this information. In that case, you will be subject to the usual penalties and interest for non-tax returns.


Ways to Reduce Taxes during Divorce

If you are in the process of a divorce, planning a divorce agreement can help save you money in the future. Although child support is no longer reported as a deduction or income, other tax effects may affect future tax returns.


Claiming Dependents

Claiming a dependent on the tax return depends on many factors. The custodial parent will usually claim the dependent, but the custodial parent cannot be the same person who has legal custody. The IRS purpose is the custodial parent is the parent with whom the child sleeps most nights for a year.

In some instances, the non-custodial parent can claim the dependent if he or she meets the following four conditions:

  • The child in question received more than 50% of their support during the parental year.

  • The child is in the custody of both parents (or one parent) for more than 183 (50%) days of the year.

  • The custodial parent signs Form 8332 indicating that they will not claim child support for one year, and the non-custodial parent attaches the written statement to the divorce declaration after 1984.

  • The parents are: legally separated by divorce, divorced or separate maintenance, separated on the basis of a written separation agreement, and living separately for the last six months of the year.

While a non-custodial parent can claim the dependent on their tax return, the child claim will not provide any benefit for certain tax benefits for non-custodial parents. These include:

  • Child care credit and accrued expenses

  • Earned income tax credit

  • Exclusion for dependent care benefits 

  • Head of health filing status

  • Tax credit for medical coverage


Choose your assets carefully.

The division of property during a divorce usually does not involve a taxable event - you generally do not have to pay any tax on the gains or losses at the time of the divorce. But if you receive property in a divorce and want to sell it at a profit in the future, you will need to pay taxes on the full value of the appreciation, not just the amount of the appreciation that has occurred after the divorce.

For this reason, it is essential to carefully choose the assets that you want in the divorce process. For instance, withdrawing money from a bank account does not generate profits or losses. However, accepting $75,000 of shares on a $25,000 basis means that you will also have a profit of $50,000 which will likely be taxed later.

Choosing $75,000 in cash instead of stocks would be a more profitable option. Most divorce attorneys are aware of these tax effects. They will look at the tax consequences of divorce agreements and help you get through them.


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