Is Alimony Taxable? What You Need to Know About Filing Taxes After Divorce

Divorce is an emotionally challenging process, and figuring out ‘Is alimony taxable?’ can really take a toll on your mental health. 

Understanding the nitty-gritty of alimony taxation amid the separation agreements and court hearings can be intimidating. 

Hence, to help you figure out your tax situation, I bring to you this comprehensive guide on filing taxes after a divorce. 

From ‘is alimony tax deductible?’ to ‘how much tax do I pay on alimony received?’ I’ll carefully answer all your queries and inform you regarding essential regulations about the taxation of alimony.

What is Alimony?

The cash payments and voluntary transactions stated as spousal support in a divorce settlement are referred to as alimony by the IRS. The provision of alimony is particularly designed to ensure that both parties in the marriage have enough resources to meet their individual needs after separation.

According to the IRS, a monetary transaction between the couple will be considered alimony if:

• None of them have filed a joint return with the others.
• All payment is made in cash, either by check or by money order. 
• Monetary transactions between the former couple are not under child support or a property settlement.
• The spouses are not members of the same household at the time when payment is made. This requirement is applicable only if spouses are legally separated under a divorce settlement.
• The payment is made to a partner or ex-partner under the divorce or separation agreement. 
• There’s no liability for the payment after the death of the recipient. 
• The divorce or separation agreement doesn’t classify the monetary transaction as not includible in the gross income of the payer spouse and not allowed as a deduction to the payer spouse. 

Is Alimony Taxable?

Alimony awarded after December 31, 2018, or the divorce settlement executed after this date is not subjected to tax for the recipient or deductible by the payer. The IRS prohibits deducting alimony or separate maintenance payments under the separation agreement finalized after 2018. 

Furthermore, the alimony agreements executed before 2019 but later changed are also not considered tax-deductible. However, this is applicable only if the modification agreement clearly specifies that the repeal of the deduction for alimony payments isn’t affected. 

Lastly, the alimony or maintenance money received under a 2019 or later agreement is not included in the gross income; hence, it is not deductible to the payee.  

There are different types of alimony, and it can be imposed permanently or temporarily, depending on the financial situation of both parties. Let’s take a detailed look at it in the preceding section. 

Also Read: What is FITW Tax? Explore Components, Benefits, and Challenges of Federal Income Tax Withholding 

What are the Different Types of Alimony Specified by the IRS?

As specified by the IRS, the different types of tax-relevant categories of alimony are as follows:

1. Pre-2019 Alimony—Agreements Executed on or Before December 31, 2018: If the divorce agreement or separation decree is finalized before December 31, 2018, and is not modified, then the payer can deduct alimony payments, and the recipient must include those alimony payments as gross income.

2. Post-2018 Alimony—Agreements Executed After December 31, 2018: The agreements signed or modified after this date prohibit the payer from deducting alimony payments and require the recipient not to include those payments in gross income under the Tax Cuts and Jobs Act (TCJA).

3. Third-Party Payments Under the Divorce Instrument: Payments that go to a third party instead of the recipient can still qualify as alimony if the divorce settlement requires them. 

4. Life Insurance Premiums: The life insurance premiums paid by the payer for a policy owned by the ex-spouse can also be counted as alimony and are typically treated as ‘paid on behalf of’ the spouse.

5. Payments on a Jointly Owned Home: In case the divorce settlement specifies the payer must cover the cost of a home jointly owned by the partners, some of these payments will also be treated as alimony. 

Which Type of Payments are not Considered Alimony?

Here are the payments the IRS has specifically outlined ‘do not count as alimony’ even if they are part of the divorce agreement! 

• Child support payments
• Voluntary payments that are not required by the divorce instrument.
• Non-cash payments like property transfers. 
• Payments that continue after the death of the recipient. 

What Factors Determine Alimony Payment?

Every state has its own specified rules for determining the alimony. However, these are some general factors that are always included while deciding the alimony payment: 

• Length of the marriage. 
• Age and income of the spouses. 
• Length of the separation of the couple.
• Future financial potential of both the parties.

Also Read: What is Form W4? – Let Your Employer Know About the Withholding from the Salary 

Where Should Alimony Be Reported on a Tax Return?

For the divorce agreement awarded before January 01, 2019, you need to report the alimony paid or received on the Form 1040, Schedule 1!

Recipient: Enter the amount on line 2a and write the date of the original divorce or settlement agreement in line 2b. You’ll also need to provide your social security number to the payer to avoid paying a $50 fine. 

Payer: Enter the amount you’ve paid on line 19a. Then mention the social security number of the receiver on line 19b, followed by the date of the final divorce agreement on line 19c. Not mentioning the recipient’s SSN will cost you a $50 fine. 

The post-2018 alimony agreements dated January 01, 2019, do not need to mention the information about alimony payments on their federal tax returns, as it is not considered as an income or deduction. 

How to Reduce Your Taxes During Divorce?

Since alimony is no longer considered a deduction or income, you can reduce your taxes during a divorce in the following ways:

Claiming Dependents

The custodial parent is subjected to claiming the dependent. However, in certain cases, the custodial parent for tax purposes might not be the same person who has legal custody of the child. In that case, it’s the parent whose house the child sleeps at the most nights. 

Choose Assets Carefully

Generally, you are not required to pay tax on gains or losses during divorce settlement. However, if you plan to sell the asset at a gain, you’ll need to pay the tax due on the whole appreciation amount, which differs from the amount of appreciation that happened since the divorce. Hence, it’s important to choose assets carefully and avoid getting stocks or property as assets.

Also Read: 529 Tax Deduction Plan: What is It, How to Claim, and Maximize the Benefits? 

What is the Difference Between Alimony and Child Support?

Child support is quite different from alimony, as it is the money paid for the care and expenses of the children, while alimony is just paid to support an ex-spouse. 

The child support covers the child’s needs, including food, clothing, schooling, medical care facilities, and other activities, and is received by the parent who has the primary custody. It typically ends when the child turns 18 or in some regions 21 or finishes high school. 

On the other hand, alimony is given to the lower-earning spouse for maintaining financial stability post-divorce. It is often temporary and can end after a set time or remarriage of the recipient and major financial changes. 

Wrapping Up!

Understanding ‘Is alimony taxable?’ is quite overwhelming, especially with the financial and emotional trauma that comes with the divorce. 

Well, the key to precise tax filing after separation is knowing which tax rules apply to your separation agreement and how the IRS treats your alimony and other payments based on the date of your divorce. 

This way you’ll be able to dodge the mistakes and keep your post-divorce finances on point. For more precision, you can seek the expert support from AccountingLads so that your tax filings never go wrong. 

Also Read: What Happens If You Don’t File Taxes? Consequences, Exceptions, and Why Clear Your Past Due Payments? 

Frequently Asked Questions

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