Paying taxes as a married couple means the IRS automatically involves itself in your marriage. If you get divorced and agree on alimony payments, the involvement doesn’t end – unless you get divorced in 2018 or later.
In the 1940s, the IRS allowed spouses paying alimony to deduct their payments from their taxable income for the first time. In 2017, the tax reform bill aimed at simplifying the way Americans file and improving the deficit struck alimony from the list of taxable deductions.
Whether you pay or receive alimony, here’s what you need to know about alimony and taxes.
Alimony and Taxes: Read This First
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), a sweeping new tax law that eliminated a significant number of deductions in the name of simplifying tax returns.
The TCJA eliminated both the alimony payment deduction and the need to report alimony as income.
What does that mean for you?
If you finalized your divorce in 2019 or made substantive changes in your settlement after 2018, then alimony has no place in your tax return. It’s neither a deduction nor reportable income.
If you finalized your divorce in 2018 or earlier, then the old tax rules apply on the alimony you pay or receive and you must report it as income or a deduction.
Seemingly straightforward tax deductions may prove to be not so simple when it comes to tax reporting. For example, as a Michigan resident it is allowable to deduct alimony payments from your taxable income. Yet as easy as this may sound, there are a number of federal requirements one must follow before taking such a deduction.
As alimony is an above-the-line deduction, it does not require itemization. However, for the payer of the alimony to deduct payments, the recipient of the alimony must report such payments as income. If the deduction on the payer’s return does not match up with the reporting of income on the recipient’s return, there are chances that both the payer and recipient may face an IRS audit.
Paying Alimony: How to Report It as a Deduction
Good news: if you paid money that the courts or IRS consider alimony, you may deduct the amount you paid from your taxable income.
And you can do this even if you don’t choose to itemize your deductions.
All alimony gets deducted on Form 1040, which is the tax form used to deal with income outside your W-2 employment.
When you deduct alimony on your 1040 form, you must be sure to add your former spouse’s social security number (SSN) to the form. It allows the IRS to match up the reported amounts on both your tax returns to confirm your deduction/their income. If you don’t have their SSN, get it. Failing to add it to your return may result in the IRS disallowing your deduction or a $50 penalty.
Rules for Deducting Alimony
Unsurprisingly, the IRS has a long list of rules that you need to meet to deduct alimony.
First, you must file separate tax returns. Either your divorce needs to be final, or you must file as “married filing separately” if you are in the process of settling.
Second, you can’t deduct alimony given in the form of assets or property. If you give your ex a vintage car to sell instead of cash alimony, you can’t write it off. Only cash alimony counts as a deduction.
Third, your divorce decree or separation agreement must clearly state that the payment is alimony or separate maintenance. Settlements and child support don’t count.
Fourth, you can’t deduct the payments if you both occupy the same household.
Fifth, you can’t write off payments made after your former spouse’s death. In all likelihood, you won’t make these payments as all as your decree or agreement should state you can stop payments at this time.
Taxpayers must fulfill a number of requirements before an alimony deduction is allowable
- Any alimony payments need to be a part of a divorce or separation agreement.
- It is required that such payments be made on behalf of the former spouse. If such payments are made to third parties, these must be made pursuant to the divorce or separation agreement and be on behalf of the former spouse.
- Any payment obligations must cease if the former spouse dies. Otherwise, the IRS will not view it as an alimony payment.
- All alimony payments must be cash or a cash equivalent.
- Child support payments are different from alimony and therefore not deductible. If there is a deduction of a so-called alimony payment after a child leaves the recipient’s home, the IRS may consider it a child support payment instead.
- There can be no reference in the divorce agreement stating that such payment is something else other than alimony.
- Neither payer nor recipient can reside in the same residence or jointly file a 1040 for an alimony payment to be deductible.
It is always better to get it right to begin with than risk an audit down the road. Reach out to speak with one of our tax law attorneys if you have any questions at all.
Don’t Fudge the Numbers or Nature of Alimony
Following the alimony deduction rules is critical. If you try to pass off child support or a property settlement as alimony and the IRS finds out, it has the right to “recapture” the amount deducted.
Why might the IRS question your alimony deduction? Temporary alimony agreements don’t count towards your deduction, so if your reported payments drop each year significantly or you stop paying alimony within three years of your divorce, the IRS will flag and investigate your returns.
Property settlements, which are not alimony, typically wrap up within 36 months of finalizing the divorce.
Another hint that your payments aren’t alimony maybe if you stop deducting alimony when your spouse stops claiming dependents.
When these events occur, the IRS looks back at your tax history. It may audit your taxes to investigate whether your divorce decree required alimony – or if you tried to write off separate maintenance.
The auditor also looks at court records. Court records may show a judge allowed you to reduce your alimony as a result of a financial crisis like job loss.
If the IRS takes this route and finds that your deduction didn’t count as alimony, it will then remove the deduction from the relevant years. The money you subtracted from your taxable income then gets added on to your taxable income in the current year.
So, if you deducted $10,000 from your taxes in 2016 and declared it as alimony, but your spouse declared it as child support, then you might have $10,000 added on to your tax bill this year if the IRS decides it was child support.
Receiving Alimony: How to Report Alimony as Income
Do you receive alimony or other like payments from a former spouse? You need to declare it as part of your income.
If you are a W-2 employee, you’ll declare your alimony on a separate tax form known as Form 1040.
Form 1040 allows you to declare all taxable income not received from your employer. It’s the form you would use to report rental income, money from side gigs, and money from a trust as well as alimony.
When you declare the alimony you receive as income, you must include the correct amount paid and your former spouse’s social security number (SSN). Adding their SSN allows the IRS to double-check the figures.
Remember that alimony is a deduction for those who pay it, so your former spouse will also include it on their taxes.
If you don’t provide their SSN, you may have to pay a $50 penalty.
Do I Have to Report Child Support?
You do not need to report money received for child support on your taxes. The IRS considers it a non-taxable event. Your spouse also can’t claim it as a deduction.
Getting Divorced in 2019: Your Tax Deduction Options
Did you get divorced in 2019 and must now pay alimony? Unfortunately, you can no longer write it off on your taxes unless Congress changes its mind.
It is still too early in the post-reform tax season for accountants and attorneys to understand the new ways to prepare their clients for financial security during and after their divorce.
However, both married couples with prenups and post-nuptial agreements and those considering ending their marriage should take a closer look at their finances.
If You Have a Pre-Nuptial or Post-Nuptial Agreement
Several of the new tax rules directly impact some of the frequently used items in pre- and post-nuptial agreements.
If you are a married couple with one of these, review it now or in the coming months to identify the affected parts of your agreements. You may find you need to re-negotiate some of the terms in light of the new laws.
If You are Getting a Divorce
As noted, alimony no longer plays a role in your taxes, and child support was always a non-taxable event.
However, you should also keep in mind that the tax deductions you previously received for children also changed.
Until 2018, you had a $4,050 exemption per dependent. The new law eliminates the exemption. Instead, it doubled the child tax credit to $2,000 from $1,000.
The difference is that the $2,000 child tax credit takes money off taxes owed thereby reducing your bill. The previous exemption was a subtraction from your taxable income.
Additionally, $1,400 of the credit is refundable, which means you can even get money back. For example, if your tax bill was $1,100 and have a qualifying child dependent, you can use $1,100 of the credit to cover your bill and get the remaining $300 back as a refund.
Finally, the Child Tax Credit now applies to high-income families in addition to low-to-middle-income families, as it did in previous years. If you earn up to $200,000 when single or $400,000 when married filing jointly, you enjoy the entire credit.
Plan Your Financial Future
If you got divorced after 2018 or you make dramatic changes to your divorce agreement, then you can no longer claim alimony as a deduction. Your former spouse will also no longer claim it as income.
It is essential to factor in the loss of the credit when you negotiate your divorce settlement, as your taxable income will remain the same.
Still, couples with children may still use the Child Tax Credit to offset their real tax liability dollar-for-dollar.
How will the 2017 tax reform bill impact your alimony and taxes? Do you have questions about your tax status or what might happen in the event of a divorce?
Get in touch for a private consultation with one of our tax attorneys.