Is Alimony Taxable?
You probably would not be reading this page, if you did not find divorce confusing, and even overwhelming. There’s the emotional journey and the black-and-white legal and financial process. Divorce can be especially bewildering when you consider the financial implications, particularly when alimony comes into play.
This article will define alimony and elaborate on the tax issues related to alimony payments. (That’s right, you’ll want to know about the tax ramifications.)
What Is Alimony and Who Gets Alimony?
The whole purpose of alimony is to audit the individuals getting a divorce to provide for greater income equity. Recent rule changes have made alimony payments and taxes more complicated.
Alimony refers to payments made to a former spouse as ordered by the court or state laws during a divorce agreement. These payments are provided to ensure financial support for the former spouse, especially if they have a lower income or none at all.
Alimony typically comes in the form of either periodic payments or a one-time payment, designed to help the former spouse maintain their accustomed lifestyle from before the divorce. Courts often award alimony in marriages lasting more than 10 years, though state laws may vary. The payments usually cease upon the terms outlined in the divorce agreement, a court order, remarriage, or death.
Determining how much alimony a former spouse must pay involves many factors. If one spouse has lower earning power than the other, the court may award alimony to the lower-earning spouse on a temporary or permanent basis.
There are several types of alimony awards:
- A temporary alimony award is one where when the divorce is pending, a financial award will be given for daily expenses and divorce costs.
- A rehabilitative award is one given to a former spouse for their education and job search while the former spouse tries to attain employment or become self-supporting.
- A permanent alimony is one given every month and continues till either the spouse remarries or dies.
In general, alimony remains flexible. Several factors influence negotiations for alimony awards and their termination.
Check out “What is Alimony?” to understand more!
Tax Issues Related to Alimony
The rules regarding taxation of alimony payments can get a little complicated.
If your divorce occurred before 2019, there is a different set of rules when it comes to taxation than if your divorce occurred after 2019.
Key Changes to Alimony Tax Rules After 2019
The 2017 Tax Cuts and Jobs Act (TCJA) eliminated tax deductions for alimony payments for divorces executed after December 31, 2018. Under this rule, the recipients of alimony payments will no longer owe any federal tax on the support payments awarded to them. Currently, the IRS allows tax deductions for payers of divorce settlements that were executed before December 31st, 2018. If your alimony award was repealed or modified after the December 31st date, your payments will be subject to the new regulations set forth by the IRS.
An important reminder is that the tax code supersedes any family court judgment.
Payments deducted must be consistent with the IRS to avoid any mischaracterization and penalties. To avoid tax liability, you should understand the recapture rules for alimony payments.
Check out “Do Stay-at-Home Moms Get Alimony?”
Deductions for alimony awards can provide great relief for the taxpayer based on your tax bracket. But be careful, if your alimony payments get kicked out under the recapture rules, then you risk facing double the federal tax liability.
If you are on the hook for paying alimony, you’ll want to read “One Divorce Shocker, Women Pay Alimony Too”
Lump-Sum Payments and the 3-Year Rule
Spousal support is generally paid over some time.
If your alimony award is paid in a lump sum, under the 3-year rule, you could lose the benefit of deductions due to recapture.
There must be payouts over a minimum of 3 years to qualify for deductions. It is also important to be aware of the type of plan you have. If you have a plan that consists of equal payments, you do not have to worry about recapture. However, if you have a payment plan that increases or decreases the value of payments over time, the fee should not vary by more than $15,000 from one year to another. If the payment varies more than $15,000, it may be subject to recapture, and you may not qualify for deductions.
Keep in mind that many divorce payments are not considered alimony. For example, payments for property upkeep, child support, and voluntary payments are not considered alimony.
It is also important to note that some state laws will differ from federal tax laws. An example of a state that differs is New York. New York laws follow the previous federal tax model. Thus, if you live in New York, and you are receiving or paying alimony awards, your state and federal taxes will be calculated differently.
Conclusion
Although it is often stressful to deal with multiple factors during a divorce, it is important to understand alimony and its impact on your taxes. Taxes can weigh heavily on your financial stability and day-to-day life. If alimony is coming into play in your divorce, you’ll want to understand how alimony works. This is best done by consulting with a divorce attorney or a tax law professional in your state. You will want to be educated on what the smartest moves are for you and your future.
NOTES
Natasha just graduated from law school and has completed her Bar exam. With a longstanding interest in health law, she aspires to work for hospitals and nonprofits in continuing to advocate for women’s rights. Her goal is to address the historical issues that continue to prevail in our society by addressing the social determinants of health.
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*SAS continues to support same-sex and nonbinary marriage. In this article, however, we refer to your spouse as husband/he/him.
