Posted by Daniel P Vigilante CPA and Profit Consultants

Seven Rules to Follow for Alimony and Taxes

Seven Rules to Follow for Alimony and Taxes

Also known as spousal maintenance, alimony is the payment from one spouse to the other after divorce. This payment helps the lower-earning spouse maintain the same standard of living after the divorce. 

Before paying, spouses can remove alimony fee, and recipients will need to report it as income. However, for divorce finalized after January 1, 2019, the rules have changed.

Is Alimony Tax Deductible?

As long as you finalize your divorce before January 1, 2019, alimony could be tax-deductible. Over the years, the Tax Cuts and Jobs Act (TCJA) is the primary tax reform in the United States, and its influence affected spousal support as well. 

The Date of Divorce Matters

For people that finalized their divorce before January 1, 2019, the spouse making the payment could report it as a tax deduction. The recipient as well must report and pay the tax on the alimony since the FG considers it as income.

If your divorce were pending after or on January 1, 2019, the IRS would not treat it as income to the receiving spouse. The paying spouse also will not take a deduction on what is paid every year.

What happens to Spousal Support Orders Created Before January 1, 2019; one might ask:

As long as the spouse follows some rules, the paying spouse could enjoy an alimony deduction for reporting purposes. To the recipient as well, they also must report the payment. For both parties, this is tax savings. Transferring alimony from a higher-earning spouse to the lower-earning one is a means of shifting income. The higher earner enjoys savings on money that will have been sent to Uncle Sam. The alimony payments also do not change the recipient's tax bracket.

Many people will prefer if alimony is tax-deductible. There is, however, a choice. The tax implications favor some couples if the payment is nondeductible and nontaxable due to the tax consequence. A tax expert will help you know what your best bet is.

Making Sure Payments Are Tax-Deductible

You cannot, however, enjoy tax deductions on all alimony payments. There are seven rules for taxpayers that want to deduct alimony payments:

  1. Payments Should come in by cash or check. For the benefit of a spouse or former spouse, the alimony should come in via cash or check. However, you cannot deduct the value of alimony given in kind, for instance, a car you gave your spouse.

  1. Follow the Instructions and Classify Payments as tax-deductible. When you make a payment, make sure it aligns with the accompanying document like a court order, separation agreement, or divorce judgment. The document should reveal the exact amount you are paying and classify it as alimony, spousal maintenance, or spousal support. The report should also organize the payments as deductible by the paying spouse and taxable by the recipient spouse. 

  1. Payments cannot be classified as Child Support or Part of Property Settlement: You cannot deduct child support payments; the same way you do alimony. With this, make sure the alimony payments are not linked to the support of your kids. For instance, if one of the agreements you reach is that the alimony expires when your kid matures, the IRS might classify former alimony as child support that is nondeductible. You will now owe back taxes because Uncle Sam will disallow past alimony deductions. In the same manner, if Uncle Sam considers your payment as your portion of the marital property, it is not tax-deductible.

  1. Show that the recipient's death triggers payment: the alimony judgment must reveal that alimony payment ends when the recipient dies. According to the document, the obligation of the paying tax ends when the paying spouse dies. If the recipient remarries, the paying spouse can cancel the payment agreement.

  1. Living apart: for people living together with their spouse, the alimony payments are not tax-deductible. For the amount to qualify as tax-deductible, they must live apart.

  1. Do not file a tax return: you cannot deduct alimony payment if you and the spouse files a tax return. 

  2. Do not pay extra fees upfront: be sure to consider the IRS rules against front-loading – this is the payment of alimony that is due later.

Daniel P Vigilante CPA and Profit Consultants
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