Alimony has two important tax statuses. If you finalized your divorce before Jan. 1, 2019, the person who collects alimony pays taxes on this money. This means that the person who pays alimony can claim a full tax deduction for the payments, while the person who receives the alimony pays taxes on it as income. Congress changed this law in the 2017 tax cut act. For all divorces finalized on or after Jan. 1, 2019, the person who pays alimony pays taxes on this money. This means that the person who pays alimony cannot claim a tax deduction for the payments, while the person who receives the alimony does not pay any taxes on this income.
You can work with a financial advisor to give you the peace of mind of managing your investments and overall finances.
What Is Alimony?
Alimony, or spousal support, is when one ex-spouse is required to make regular payments to the other ex-spouse after they get divorced. Every state has its own laws that govern this issue, and the specific details of an alimony agreement, such as how long payments will continue, how large they will be, and who will make them, differ from case to case.
Not every payment made through a divorce counts as alimony. When you make payments as part of a divorce or separation agreement, the IRS considers it alimony or spousal support if it meets the following criteria:
- You were legally married for tax purposes, meaning you could have filed a joint tax return.
- You are no longer legally married for tax purposes, meaning you cannot file a joint tax return.
- The payments are a cash transfer, not made in kind or through any other means.
- You make these payments based on a legally binding divorce or separation agreement.
- You are no longer part of the same household, meaning that you cannot have the same legal residence.
- The payment is issued to and on behalf of the ex-spouse.
- The payment is not meant to cover child support, payment for property or other obligations.
If your agreement meets these criteria, the IRS will most likely consider it alimony for tax law purposes.
Alimony Payments Pre-2019
If your divorce or separation agreement was finalized on or before December 31, 2018, federal income taxes on alimony income are paid by the person who receives it. This means:
If you are the person who issues the alimony payments, you can fully deduct these payments from your federal income taxes. This income is transferred to the other part of your former household, and so does not count as your income.
If you are the person who receives alimony payments, you must include this money as part of your income for federal income tax purposes. As above, this income has been transferred to your part of the former household, making you responsible for the taxes on it.
It’s important to note that this applies only to federal income taxes. Every state has its own tax laws, and addressing the specific rules of all U.S. states and territories is beyond the scope of this article. Be sure to check the status of your own state’s income tax laws.
Alimony Payments Post-2019
The Tax Cuts and Jobs Act of 2017 made several sweeping changes to U.S. tax laws. Among these, the law reversed the position on alimony transfers. For all divorce or separation agreements finalized on or after January 1, 2019, or for all agreements substantially modified on or after that date, federal taxes on alimony income are paid by the person making those payments. This means:
If you are the person who issues the alimony payments, you cannot deduct these payments from your federal income taxes. You are responsible for paying taxes on this income before transferring it to the other part of your former household.
If you are the person who receives alimony payments, you do not have to include this money as part of your income for federal income tax purposes. The taxes on this income have already been paid by the ex-spouse who issues the payments. As above, this only applies to federal income taxes. Be sure to check the status of alimony and income taxes in your state or territory to determine your obligations under those rules.
Why Does Only One Spouse Pay Alimony?
The tax status of alimony is based on the legal theory of spousal support. Strictly speaking, alimony payments function as a transfer of income. During a marriage, both parties share and pay taxes on their income as a single household. After the marriage, alimony requires that they partially continue to do so.
Originally this was based on the idea that women needed a man to support them. Their father would do so until their husband took over. After a divorce, the law would require a woman’s ex-husband to support her for a period of time. While widely discredited and specifically disclaimed by the Supreme Court in 1979, some elements of this idea survive in practice. Most notably, it is common for states to permit alimony terms that continue until the recipient either remarries or retires.
The theory of alimony is critical because it determines the system’s tax status. Despite the terminology, alimony is not a system of payments but rather of transfers. The two parties continue to share a portion of the former household’s income, which one ex-spouse transfers to the other. This means that only one person owes taxes on the shared income since it is still considered, in effect, money shared across a single household.
The Bottom Line
One party always pays taxes on alimony payments. If you finalized your divorce before 2019, it is the person who receives the money. If you finalized your divorce after 2019, it is the person who makes the payments. These payments can not be deducted from taxes for the person paying the alimony. It’s important to prepare your finances to handle these tax payments if you are paying alimony.
Personal Finance Tips
- Once you get married, it’s time to start planning for two. Finances are one of the things most impacted by both marriage and divorce so it’s important to properly prepare your finances now. You can work with a financial advisor to properly prepare financially for the big day. SmartAsset’s free tool you can find a financial professional in your area to help make sure you’re making those plans wisely and well, because once there’s someone else in the picture it’s time to really get those finances in shape, get started now.
- Marriage and divorce might be the two biggest tax events of all. Not only is there a marriage bonus in your year-end taxes, but it turns out there’s also a marriage penalty.
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