The tax treatment of alimony was one of the many items modified by the Tax Cuts and Jobs Act of 2017 (“TCJA”). Alimony received is no longer taxable income to the recipient spouse and alimony paid is no longer deductible by the payer spouse for divorce or separation agreements executed after 2018, unless...
This change does not apply to divorce or separation agreements executed prior to 2019. For those agreements, the prior rules apply in which the alimony recipient reports the alimony received as taxable income and the payer of the alimony can deduct the alimony paid as an “above-the-line” deduction. An “above-the-line deduction” adjusts gross income, which allows a taxpayer to claim a deduction without itemizing. Alimony received and paid for divorce and separation agreements executed prior to 2019 are reported on Schedule 1, “Additional Income and Adjustments to Income,” which is attached to Form 1040.
There is a special rule for modifications to pre-2019 divorce or separation agreements. The modification will not cause the agreement to be subject to the new TCJA rules, unless the modification expressly provides that the TCJA rules are to apply. Sometimes, applying the TCJA rules voluntarily is beneficial to the taxpayers, due to changes in the income levels for the alimony recipient or payer.
For those still eligible to deduct alimony payments on their tax return, please remember not all payments made to an ex-spouse are considered alimony for tax purposes. A payment is alimony only if all the following requirements are met:
The payment must be made under a divorce or separation agreement. Informal or voluntary payments to the ex-spouse are nondeductible.
Payments of alimony must be made in cash (not property).
The payments are required to stop when the recipient spouse dies.
The spouses aren’t living in the same household.
The spouses do not file a joint tax return
The divorce or separation agreement doesn’t identify the payment as something other than alimony. For example, payments treated as child support or property settlement are not alimony.
The tax implications of divorce can be complex. You should work with your attorney and tax advisor to consider the tax impact of property settlements and alimony. If you need assistance with analyzing the tax impact of your divorce or separation agreement, call on us.