How Is Alimony Taxed in a Divorce?

Going through divorce is a difficult experience, even if both soon-to-be-ex-spouses agree it is for the best. When multiple factors are involved, such as splitting assets and child support, it can get emotional and even ugly.

The subject of alimony is often a hot button in divorce proceedings. When the couple decided to start a family, did one parent leave his or her career for child-rearing and homemaking? This narrative persuades many judges to award alimony, but it’s just one of many.

Regardless of the reason, the whole purpose of alimony is to audit the incomes of the former couple. The bigger the income inequity, the more likely alimony will be granted.

For years, having worked with clients in the middle of divorce proceedings and in need of a tax attorney, I knew the federal government offered some tax relief on alimony payments for both the payee and the payor.

In any case, unless the split with your spouse happened before the 2019 Tax Cuts and Jobs Act, alimony payments and taxes have gotten only more involved and expensive. This article should shed light on the new rules.

The Tax Cuts and Jobs Act eliminated the tax deduction for payers of alimony. This change applies to new divorce agreements settled after December 31, 2018.

Along with eliminating the tax deduction for the payor, the change also eliminates the previous requirement on the receiving spouse to include the alimony payment in their taxable income. While this might seem like a score for those receiving alimony, it may not benefit everyone.

The old rule requiring the alimony money to be taxed on the side of the recipient was actually a pretty big benefit to both payers and receivers. This is usually the case when the paying spouse is a middle-class wage-earner in a higher tax bracket than the recipient.

There are two specific benefits for parties to an alimony agreement in this financial situation under the old rule.

The first benefit was the payor’s ability to deduct the income being a significant tax break because the payor can exclude the income completely from his or her taxable income.

In some instances, this prevents the amount of money that would have pushed the payor into a higher tax bracket from being taxed at the marginally higher rate.

The second tax-reducing measure was allowing the money to be taxed at the recipient’s end. In many cases, the recipient’s income was taxed at a lower rate which meant there are more post-tax dollars for both sides to share.

If you have an alimony agreement in place which was finalized before January 1, 2019, you are grandfathered into the old rules. This means you can continue enjoying the deductions taken in correspondence with alimony payments.

However, you should first be sure that your payments qualify as alimony, even if your alimony agreement was made in family court. As a reminder, family court judgements do not supersede the tax code. In order for spousal support payments to be considered alimony, and therefore tax-deductible, your agreement should be consistent with the following requirements under the tax code:

1. The payments must be required under a divorce or separate maintenance decree or written separation agreement;
2. The payments must be paid in cash (debit is allowed, but no bartering for goods or services);
3. There must be no liability for payment after the death of the recipient;
4. The spouses may not live in same household; and
5. The divorce or separate maintenance decree may not designate the payment as anything other than alimony—for example, child support.

It is necessary that payments deducted as alimony are consistent with these requirements, otherwise you could face the IRS making a claim that you mischaracterized what should actually be a taxable property distribution.

There is also an additional concern worth mentioning to avoid tax liability that consists of two rules. These two rules may invalidate your deductions under what is known as “Recapture.”