Tax Deductions For Divorce Agreements Prior To 2019
If you have an alimony agreement in place which was finalized before January 1, 2019, you are grandfathered into the old rules. This means you can continue enjoying the deductions taken in correspondence with alimony payments.
However, you should first be sure that your payments qualify as alimony, even if your alimony agreement was made in family court. As a reminder, family court judgements do not supersede the tax code. In order for spousal support payments to be considered alimony, and therefore tax-deductible, your agreement should be consistent with the following requirements under the tax code:
It is necessary that payments deducted as alimony are consistent with these requirements, otherwise you could face the IRS making a claim that you mischaracterized what should actually be a taxable property distribution.
There is also an additional concern worth mentioning to avoid tax liability that consists of two rules. These two rules may invalidate your deductions under what is known as Recapture.
Who Reports Alimony Payments As Taxable Income
The Tax Cuts and Jobs Act of 2017 changed the way alimony is treated on tax returns for divorces that were finalized in 2019 or afterwardso the date your divorce was finalized is key.
For divorces finalized in 2018 or prior years:
- Alimony you pay is deducted from your taxable income, but must meet certain requirements to be deductible:
- The payment must be by cash, check or money order.
- You and your spouse cant live in the same home.
- You cant count payments made after your ex dies or remarries, since youre not obligated to pay those.
- The payment cannot be for child support.
For divorces finalized in 2019 or later years:
- Alimony you pay is not deductible.
- Alimony you receive is deductible, since its no longer considered taxable income, but you must still report the income on your taxes.
Regardless of the year your divorce was finalized, you must give your ex-spouse your SSN, so that he or she can report the payments on their taxes. Your ex can probably get your SSN from a prior tax return, but if he or she doesnt have your SSN and cant get it from you, the IRS can fine you $50.
Clarification: Changes To Deduction For Certain Alimony Payments Effective In 2019
This article clarifies information provided in IRS Publication 5307, Tax Reform Basics for Individuals and Families for the repeal of deduction for alimony payments under the Tax Cuts & Jobs Act of 2017.
Alimony or separation payments paid to a spouse or former spouse under a divorce or separation agreement, such as a divorce decree, a separate maintenance decree, or a written separation agreement, may be alimony for federal tax purposes. Alimony or separation payments are deductible if the taxpayer is the payer spouse. Receiving spouses must include the alimony or separation payments in their income.
Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after Dec. 31, 2018.
This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, as long as the modification:
- changes the terms of the alimony or separate maintenance payments and
- states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
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Is Alimony Received Taxable In 2020
Alimony taxation The taxation of alimony on federal tax returns recently changed because of the Tax Cuts and Jobs Act of 2017 . Today, alimony or separate maintenance payments relating to any divorce or separation agreements dated January 1, 2019 or later are not tax-deductible by the person paying the alimony.
Alimony Tax Rules For Divorces Before 2019
The old tax rules still apply if your divorce agreement was executed or your divorce decree was issued in 2018 or earlier. In these divorces, alimony is still considered taxable income for the recipient, and it’s still tax deductible for the payer under the same rules.
Payers must still meet certain requirements for these payments to qualify as deductible alimony.
The new rules also apply if a decree or agreement is modified after Dec. 31, 2018, and the modification states that the repeal of the alimony deduction applies to the modification.
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Pay Alimony According To The Divorce Document
You must make alimony payments according to the rules stipulated in your divorce papers. The document could be a separation agreement, marital settlement agreement, divorce judgment, court order, or temporary support order.
Ensure your documents indicate the amount you should pay and a clear description of the payment alimony, spousal maintenance, and spousal support. The papers must also describe the amount as deductible by the paying spouse.
The Date Of The Divorce
The Tax Cuts and Jobs Act came into effect in December 2017, resulting in significant changes in alimony taxes. You can only report your alimony payments as a tax deduction only if you finalized your divorce by December 31, 2018. Similarly, the recipient must report the amount as income and pay tax.
If you concluded your divorce process from January 1, 2019, you cant claim a tax deduction for alimony payments. Also, the IRS doesnt take spousal support as income for the recipient. Therefore, the receiving spouse doesnt pay tax on it. The same applies to alimony agreements modified after December 31, 2018.
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Do You Pay Taxes On Alimony And What Are The Recent Changes
Alimony payments are an essential part of a lesser-earning divorcees income. They offset expenses their paychecks cannot cover, such as assets endowed to them through divorce. For pre-2019 agreements, these payments are tax-deductible for the payer, lowering their taxable income.
However, post-2018 agreements will see drastic changes some Floridians may have mixed feelings about.
Reporting Taxable Alimony Or Separate Maintenance
If you paid amounts that are considered taxable alimony or separate maintenance, you may deduct from income the amount of alimony or separate maintenance you paid whether or not you itemize your deductions. Deduct alimony or separate maintenance payments on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors , Additional Income and Adjustments to IncomePDF). You must enter the social security number or individual taxpayer identification number of the spouse or former spouse receiving the payments or your deduction may be disallowed and you may have to pay a $50 penalty.
If you received amounts that are considered taxable alimony or separate maintenance, you must include the amount of alimony or separate maintenance you received as income. Report alimony received on Form 1040 or Form 1040-SR PDF) or on Form 1040-NR, U.S. Nonresident Alien Income Tax Return PDF). You must provide your SSN or ITIN to the spouse or former spouse making the payments, otherwise you may have to pay a $50 penalty.
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How To Avoid Paying Taxes On A Divorce Settlement
Divorce settlements can be extremely complicated. While it makes eminent sense to work with a financial advisor as you plan your finances for a divorce, there are several key areas that can hold promise of avoiding or at least minimizing taxes on a divorce settlement. Before diving into specifics, it helps to get an overview of how divorce is treated by federal tax policy. Consider working with a financial advisor if youre facing the prospect of a divorce or are currently in the middle of it.
Payments Not Alimony Or Separate Maintenance
Not all payments under a divorce or separation instrument are alimony or separate maintenance. Alimony or separate maintenance doesnt include:
- Child support,
- Noncash property settlements, whether in a lump-sum or installments,
- Payments that are your spouse’s part of community property income,
- Payments to keep up the payer’s property,
- Use of the payer’s property, or
- Voluntary payments .
Child support is never deductible and isn’t considered income. Additionally, if a divorce or separation instrument provides for alimony and child support, and the payer spouse pays less than the total required, the payments apply to child support first. Only the remaining amount is considered alimony.
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How Will Alimony Payments Affect Your Taxable Income
For alimony payments that were executed prior to 2019, theres no change in the federal income tax arrangement. For the support to continue to qualify as tax-deductible however, payers must still satisfy the established list of specific tax-law requirements or be subject to recapture.
Alimony payments do not have to be itemized on the payers federal income tax return but payment recipients must continue to include alimony payments in their taxable income. Business as usual, as the saying goes.
However, starting January 1, 2019, anyone in divorce proceedings and bargaining with their soon-to-be-ex-spouses should keep in mind that alimony payments are no longer tax-deductible due to the recent Tax Cuts and Job Act.
If your proposed divorce agreement includes multiple assets, alimony and child support, its a good idea to consult with a tax law professional. Call Brotman Law at 330-9579 or visit www.sambrotman.com to set up a free one-hour consultation. The new rules can get complicated and the IRS is paying attention.
Understand The Tax Consequences Of Dividing Property
Under the Internal Revenue Codes § 1041, the division of property by divorce is not a taxable event. But there is a potential tax issue that is often hidden the tax basis. The tax basis of a particular property is the price used to determine the capital gains tax when the property is sold . Some property, as with cash, carries no capital gain when sold. Other property, as with a residence, is exempt from capital gain up to a specified dollar amount. Many investments will incur a capital gains tax when the property is sold.
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What To Do To Negotiate Skillfully Regarding Spousal Maintenance And Contractual Alimony
This is an important subject all the way around. If you are the spouse who needs the alimony to survive, you cannot negotiate poorly. Most divorces do not see the inside of a courtroom. This means that if you are to receive post-divorce financial support, then it is likely that you will do so in the form of contractual alimony. Negotiating well about this crucial subject could mean the difference between financial peace of mind and scrambling to survive.
On the other hand, if you are the spouse paying spousal maintenance, you need to make sure that you get a fair deal. While there are limits to what a judge can order you to pay in care, contractual alimony does not abide by those rules. To ensure that your spouse is not taking you to the cleaners, you are well-advised to have an experienced family law attorney by your side during negotiations.
Opting Out Of The Previous Rules Through Modification
While you do not have the option to opt-in to the old rules if you did not finalize your alimony settlement before December 31, 2018 if your settlement was finalized before the deadline, you have the option to modify your settlement and opt-out of the old rules.
As mentioned above, the elimination of the alimony deduction going forward will be a loss to many. However, some may benefit from the changes. This may apply to parties where the payor may now be in a lower tax-bracket and no longer need the deduction or the recipient is currently in a higher tax-bracket, and it would no longer make sense to have the money taxed on the receiving end.
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The Alimony Recapture Rule
The Internal Revenue Service reserves the right to “recapture” your deductions if it determines that the payments you made don’t qualify as alimony. This means that the amount of alimony you deducted must be added back to your income in future tax years, at which time it becomes taxable.
This might happen if the amount of your payments drops significantly within one to two years of your divorce or if your alimony payments end entirely within three years of your divorce. It might also happen if payments end as soon as your youngest child leaves the nest. The IRS will review your situation to determine whether the payments were indeed alimony or separate maintenance.
Your payments can’t decrease by $15,000 or more in the third year, compared to what they were in the second year, and the last two years’ payments can’t “decrease significantly” compared to the payment in the first year.
No dollar amount is attached to the “decrease significantly” ruleit’s open to IRS interpretation. The idea is to prevent spouses from camouflaging property settlements as alimony to claim the deduction. Property settlements are often completed within the first three years after the divorce.
The IRS makes exceptions for circumstances beyond your control, such as if alimony is modified downward by the court due to an unforeseen financial crisis.
These time frames apply more stringently to divorce agreements entered into between spouses rather than by court orders.
Do I Pay Taxes On Alimony Received
If you receive monthly spousal support, you must pay income tax on the total support you receive each year. And, you can claim a tax deduction on legal fees spent to get monthly spousal support. But, if you receive all of your spousal support at once in a lump-sum payment, you do not pay income tax on it.
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The Old Rules For Alimony And Taxes
For tax purposes, the old rules state that alimony in divorce or separate maintenance agreements reached before January 1, 2019, should be included as taxable income to the recipient and deducted from the taxable income of the paying spouse. If youre curious, IRS Code Sections 71 and 215 are the areas that govern the tax implications of alimony before January 1, 2019.
The old rules state that for alimony to be taxable to the recipient and deductible to the person paying it, it must meet the seven requirements of Code Section 71. To summarize those requirements:
The Date Of Divorce Matters
If you finalized your divorce before January 1, 2019, the spouse paying support may report the payments as a tax deduction, and the recipient must report and pay taxes on the alimony as income . For couples whose divorce was pending on or after January 1, 2019, the Internal Revenue Service no longer treats spousal support payments as income to the spouse who receives it, nor does it allow the paying spouse to take a tax deduction for the amount of alimony paid each year.
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How Can All Of This Information Be Summed Up
If you were divorced before January 1, 2019, then the way that your alimony, spousal maintenance, or spousal support payments are taxed will not change. If you have a divorce finalized before 2019 and attempt to come back and modify that award somehow, you open yourself up to submitting to the changes in the tax laws that we have spent some time discussing today. Finally, even if your divorce was filed in 2018 but is still pending to this day, your divorce will be subject to the tax law changes. It doesnt matter that you filed your divorce before January 1, 2019.
Examples Of Alimony Payment New Law And Old
The tax implications of alimony payments can be confusing. So to help, here are examples using both the new and the old law.
In the divorce settlement, John was ordered to pay alimony to his wife, Susan. John earns $350,000 a year and Susan is a stay-at-home parent. John is ordered to pay $75,000 in alimony per year.
Note: Our examples use the 2020 tax bracket. Tax brackets are updated every year by the IRS, so the actual figures may vary.
The New Law Marriages Settled After Jan. 1, 2019
In the new law, John is liable to pay income tax on the $75,000 alimony payment. Because Johns annual income of $350,000 puts him in the 35% tax bracket, he would have to pay an estimated $26,250 in taxes . He cannot deduct this from his income.
When Susan receives the $75,000 alimony payment, she does not have to pay income tax on it.
2020 Tax Brackets
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