Whether you’re the one writing the checks or the one cashing them, understanding the tax implications of alimony can save you from a financial headache. The transition from filing taxes while married to filing when single can be complex, especially when alimony is involved, as the rules around it have changed in recent years.
For decades, alimony was treated as taxable income for recipients and a tax deduction for payers, but this arrangement changed with the Tax Cuts and Jobs Act of 2017. This law shifted the tax landscape for divorcing couples, who now have to look at their financial situations differently.
To help you get your bearings, we’ll answer some of the most common questions about alimony, and divorce and taxes, the reasons behind the recent changes, and what these changes mean for both alimony payers and recipients in today’s tax environment.
What is considered alimony?
Alimony is a court-ordered payment from one spouse to another before or after a legal separation or divorce, usually because one spouse makes less or sometimes no income. Alimony payments are often paid in monthly installments, as a one-time lump sum, or as temporary payments during the separation period before a divorce is finalized.
Alimony is sometimes referred to as separation maintenance, but they are technically different. Alimony is paid from one ex-spouse to another after the divorce is finalized, while separation maintenance is paid from one spouse to another during a period of legal separation.
Though they fall under different terms, both alimony and separation maintenance payments are treated the same when it comes to taxes.
The purpose of alimony is to provide financial support to the lower-earning spouse, helping them maintain a standard of living similar to what they experienced during the marriage. The amount and duration of alimony payments can vary greatly depending on factors such as:
- The length of the marriage
- Each spouse’s earning capacity
- Respective financial needs
Courts may also consider other factors like age, health, and contributions to the marriage when determining alimony arrangements.
Typically, for a payment to be considered alimony, it must meet the following criteria:
- It must be a cash payment or cash equivalent. Noncash property settlements or transfers don’t apply.
- The spouses in question don’t file taxes jointly.
- The payment is made under a divorce or separation settlement.
- The spouses aren’t living in the same household when the payment is made.
What’s excluded from alimony?
The following generally don’t count as alimony or separation maintenance:
- Child support payments
- Property settlements or transfers
- Payments to a spouse for their share of income from a property owned jointly with the other spouse
- Payments to maintain the paying spouse’s property
- Use of the paying spouse’s property
- Voluntary payments (those not required by the terms of the divorce or separation settlement)
Note that laws may vary by state, so it’s important to research the nuances that may apply to your situation.
When is alimony taxable?
The answer for alimony being taxable used to be “yes”, but since the implementation of new tax laws, it now depends on when your divorce agreement was executed.
When is a payment considered alimony?
- Cash payment or cash equivalent.
- You aren’t filing taxes jointly.
- It’s made under a divorce or separation settlement.
- You aren’t living in the same household when the payment is made.
Divorce agreements before the end of 2018
For divorce agreements executed on or before December 31, 2018, alimony payments are taxable to the recipient and deductible by the payer. If this applies to you, be sure to include your alimony payments in your gross income when filing taxes.
Divorce agreements after 2018
For divorce or separation agreements executed after December 31, 2018, alimony payments aren’t taxable to the recipient nor deductible by the payer.
This also applies if a divorce agreement was initially executed before 2018 but modified after 2018 and explicitly states that alimony payments aren’t subject to tax. In both of these cases, alimony should not be included in gross income as it pertains to taxes.
It’s important to note that we’re referring to federal taxes specifically because there are certain states in which alimony is taxable. For example, California doesn’t conform with the new federal law as it pertains to state taxes. So, if you live in California, you can deduct alimony payments when filing your state taxes.
Why was alimony taxable before?
The alimony tax system was set up so that it represented the transfer of income from one household to another, so the payer could deduct the payments and the recipient had to pay tax on that income. It encouraged divorced couples to reach alimony agreements so that the paying spouse could deduct the alimony from their income.
However, many people abused the system by failing to report spousal support as taxable income while paying spouses continued to take deductions. The law was eventually changed in 2017 with the Tax Cuts and Jobs Act (TCJA) and went into effect on January 1, 2019.
Do you include alimony in your gross income?
If your divorce was finalized after January 1, 2019, you should not be including alimony payments in your gross income. By removing the requirement for alimony to be included in the recipient’s gross income, the law aimed to reduce the complexity and potential for discrepancies in tax reporting.
Gross income generally includes all income from any source unless specifically excluded by law. Some common examples of what is included in gross income are:
- Wages and Salaries: Compensation for services, including bonuses and commissions.
- Business Income: Income from self-employment or business activities.
- Interest and Dividends: Earnings from investments.
- Rental Income: Income from renting out property.
- Capital Gains: Profits from the sale of assets or investments.
- Retirement Income: Distributions from retirement accounts like 401(k)s and IRAs.
- Unemployment Compensation: Benefits received if you were or are unemployed.
- Social Security Benefits: Depending on your total income, a portion of Social Security benefits may be taxable.
Is alimony deductible for payors?
Under the new rules, alimony payments aren’t deductible for payors. That said, divorcees and divorced parents might want to consider the following deductions and credits:
- Child Tax Credit: If you have dependent children, you may be eligible for the Child Tax Credit, which can reduce your tax bill.
- Head of Household Filing Status: If you’re a single parent and meet certain criteria, you may qualify for the Head of Household filing status, which offers a higher standard deduction and more favorable tax brackets.
- Dependent Care Credit: If you pay for childcare so you can work or look for work, you may be eligible for the Dependent Care Credit.
- Medical Expenses: You can deduct medical expenses for yourself and your dependents if they exceed 7.5% of your adjusted gross income (AGI).
- Education Credits: If you or your dependents are pursuing higher education, you may qualify for education credits such as the American Opportunity Credit or the Lifetime Learning Credit.
These deductions and credits can help lessen the financial impact of divorce by helping you lower how much you owe when it comes time to pay taxes.No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.