According to the Census Bureau, over 243,000 Americans received alimony in 2016; all but two percent of them were women.
If that number seems smaller than you might expect, it is. Both alimony and the amounts prescribed by judges are on the decline. Today, more women now pay alimony than before. And judges are increasingly veering away from permanent alimony (payments until death or remarriage).
The federal government also recently made changes to the way it treats alimony.
What of the state of alimony in your tax returns? Is alimony considered income? More importantly, is alimony taxable?
Thanks to the 2017 Tax Cuts and Jobs Act, the answer is maybe. It depends on when you got divorced. Here’s what you need to know if you pay alimony.
Alimony: The New Rules
Before 2017, alimony income was taxable for the recipient and a tax deduction for the paying spouse.
Alimony was previously a significant amount of income for the recipient and a massive cost for those who paid it.
Both parties needed to report the paid/received alimony on their annual tax returns. The IRS would compare the ex-spouses returns and confirm the numbers. If the numbers didn’t match up, one or both could be in trouble.
The Tax Law That Changed Everything
In 2017, Congress passed the Tax Cuts and Jobs Act. The act attempted to simplify the tax system and did away with a significant number of deductions.
The new rules eliminate the option to deduct alimony payments from your taxes from 2018 forward. Recipients no longer need to declare them as taxable income.
However, the rules don’t apply to everyone. It only applies to alimony demanded in divorces that took place after December 31, 2018, or if a divorce settlement was significantly modified after the date (to include alimony or to state that the new laws apply).
That means if you finalized your divorce and began paying alimony before the end of 2018, it remains taxable income/a deduction.
Is Alimony Taxable? The Answer in Two Sentences
If you were awarded alimony from January 1, 2019, then your alimony isn’t taxable.
If you have been paying/receiving alimony before the end of 2018, then your alimony is taxable.
The Rules for Writing off Pre-2019 Divorce Alimony
At this point, if you can write off alimony, then you already have done so for the 2018 tax year. However, it is still worth reiterating that there are requirements in place to allow you to deduct the alimony you pay.
First, your alimony must be official. To include it as a deduction, the demand must exist in your divorce or separation agreement (e.g., divorce decree, separation instrument, separate maintenance decrees).
Second, only payments made to your ex-spouse directly count. You can pay an attorney, mortgage lender, or third-party if it is a written request provided by your ex-spouse.
Third, you cannot live in the same household or file joint tax returns and use the alimony as deductible.
Fourth, you must pay in cash. You can’t consider a car, house, rent, or another piece of property to be alimony.
Finally, your alimony must be alimony. Child support doesn’t count. It needs to be written down as alimony in your agreement.
Again, if your alimony was demanded after December 31, 2018, then none of these rules apply because the alimony you pay is no longer a tax deduction.
What Replaced Alimony Deductions?
If you are required to pay alimony and you don’t qualify for the deduction, you should know there was no replacement.
There were, however, some increases in other credits as well as options available to divorced couples.
The current (post-December 31st, 2017) Child Tax Credit offers you $2,000 per qualifying child under 17 with up to $1,400 refundable. You can also earn more money before the credit begins to shrink (up to $200,000 for single households). However, the credit is only available to the custodial parent as a general rule (i.e., the parent with custody most of the year).
If you are the non-custodial parent, you can also claim these credits. However, you can only do so if the custodial parent doesn’t claim the credit and signs a waiver agreeing not to claim the child. If you have two children, you can request one, and your spouse can claim the other. You can’t both claim both.
Additionally, if you are the custodial parent, you can file for head of household, which is more favorable than filing as a single person.
Your children’s medical expenses are also tax-deductible, even if you only have partial custody of the child. From 2019, you can deduct costs exceeding 10 percent of your income.
If you divide or sell property, make sure you and your ex-spouse do so during a period that’s most favorable to your tax return. Talk to your accountant for more details.
Can I Terminate Alimony Payments?
The loss of the deduction is a blow to anyone who must now pay alimony and wasn’t grandfathered into the deduction.
Your ability to terminate alimony payments depends on your divorce agreement and your state. Some states allow you to stop paying alimony when your supported ex-spouse cohabitates with a new partner. If your partner becomes financially self-sufficient, some states may allow you to end your agreement. Your alimony obligation almost always ends when your ex-spouse gets remarried.
If the alimony becomes too much without the deduction, you need to re-open your divorce settlement and negotiate an agreement that acknowledges the impact on your finances.
Your Taxes Change When You Get Divorced
Is alimony taxable? If you previously qualified for the alimony deduction, then you still do. But if you got divorced after the 2018 deadline, then your alimony isn’t deductible nor does it count as taxable income.
A divorce dramatically changes the way you file taxes. From custody to the division of assets, the first few years can cause you to lose credits and deductions you once relied on.
If you recently finalized your divorce, get in touch for a free consultation. We can help you navigate your new income tax bracket and guide your division of assets to protect your finances.
