Recent Tax Law Changes Can Be Expensive For People Who Pay Alimony To An Ex
The Tax Cuts and Jobs Act eliminated the federal income tax deduction for alimony payments required under divorce agreements executed after Dec. 31, 2018. On the other side of the coin, recipients of such alimony payments dont have to include them in taxable income.
In divorce, one spouse or ex-spouse may become legally obligated to make payments to the other party. Because these payments are often substantial, being able to deduct them, or not, can be a significant tax issue. Before the 2017 Tax Cuts and Jobs Act , payments that met the tax-law definition of alimony could always be deducted by the payer for federal income tax purposes. And recipients of alimony payments always had to report the payments as taxable income.
This old-law treatment continues for alimony payments made under pre-2019 divorce agreements. But for payments made under post-2018 agreements, its a much different story. Heres the scoop.
No deductions for alimony payments required by post-2018 divorce agreements
The TCJA eliminated the federal income tax deduction for alimony payments required under divorce agreements that are executed after 12/31/18. On the other side of the coin, recipients of such alimony payments dont have to include them in taxable income.
For individuals who pay alimony, this change can be expensive because the tax savings from being able to deduct alimony payments under the old-law rules could be substantial.
Requirements for deductible alimony
6. Cannot be child support
Taxes On Alimony And Child Support
Theres a tax difference between alimony and child support payments. A person making qualified alimony payments can deduct them. Alimony payments received by the former spouse are taxable and you must include them in your income. The payor cant deduct child support, and payments are tax-free to the recipient.
To qualify for the alimony deduction:
- You must make the payment in cash, not property.
- A spouse or someone for the spouse must receive the payment under a divorce or separation instrument.
- The agreement cant specifically exclude the payment from being either of these:
- Included in the recipients income
- Deducted by the payor spouse
The amount you pay might depend on the life event of a child. If so, you cant claim the payment or the portion affected by the event as alimony.
The law allows recapture of certain alimony deductions. This keeps large payments from being treated as deductible alimony in the first few years after a divorce. Instead, they can be treated as a nondeductible property settlement.
Youre subject to the recapture rule in the third year if either of these applies:
- The alimony you pay in the second and third years decreases significantly from what you pay in the first year.
- The alimony you pay in the third year decreases by more than $15,000 from the second year.
Who Gets The Child Tax Credit In Divorce
The federal tax code, by default, allows the parent with custody of a child for the majority of the calendar year to get the child tax credit for that child. However, the tax code allows the custodial parent to waive that right so the non-custodial parent can use it if they sign IRS Form 8332. In 2021, the child tax credit was raised to $3,600 for children younger than 6 and $3,000 for children age 6 to 17.
Washington courts awards the child tax credit based on a number of factors including which parent provides the majority of the childs support and the degree of economic benefit each party would obtain from the credit.
Recommended Reading: Power Of Attorney For Matters Of Divorce
Don’t Miss: How Long You Have To Be Married To Get Alimony
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:
- 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.
Judges Use The Formula As Guide Or Starting Point
These formulas are just guides. The judge can vary the amount based on your situation.
For example, it might vary if you or your spouse:
-
Pay for your child to attend college
-
Have high medical bills
-
Have a lot of money in savings
You and your spouse can always agree to a different amount that makes sense for your situation.
Get help from your court.
Also Check: Professions With Highest Divorce Rates
End The Marriage Asap
The amount of alimony that a spouse pays will be determined by your state. However, the length of the marriage is a criterion that many governments evaluate. The longer a person has been married, the more probable he or she may be required to pay alimony. If you feel your marriage isnt going to work out, think about quitting it as soon as possible. Extending it further just results in additional emotional distress and longer-term alimony payments.
Federal Rules On Taxing Alimony
For years, the Internal Revenue Service treated alimony as follows: Alimony was taxed as income to the recipient and was deductible by the alimony payer. The system encouraged parties to reach a settlement by giving alimony payers tax incentives to agree to higher alimony awards. In late 2017, that system changed.
Under the Tax Cuts and Jobs Act of 2017 , signed into law by former President Trump on December 22, 2017, alimony payments are no longer tax-deductible, and alimony recipients no longer have to pay income tax on alimony received. The new taxation rules apply to all divorces finalized on or after January 1, 2019.
Read Also: How Is Alimony Calculated In Texas
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.
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.
Read Also: Is It Better To File For Divorce First
Negotiate Intelligently To Avoid Paying Alimony
In addition, the spouse should exercise diligence to ensure the alimony number to which he or she intends to agree is an amount the spouse can afford in light of other agreement terms.
Here is one example – If a spouse takes on a high level of debt that is community property and which the other spouse should pay half of but does not, is it really reasonable to agree to pay alimony on top of taking all that debt? The short answer is usually no.
If one spouse takes on 100% responsibility for community debt and alimony without taking that extra debt into consideration, that paying spouse gets hit hard financially. There is only so much disposable income to go around.
The higher earning spouse should not look at alimony in a vacuum
The above example underscores an important point – settlement agreements that include alimony should take into consideration other terms when determining alimony amounts.
Cookie-cutter settlements where assets are divided equally, debts are divided equally and one spouse should clearly pay an alimony amount consistent with the marital standard of living are one thing. But if one spouse takes on more debt than the other or other terms exist that impact the higher earning spouse’s net disposable income, negotiations should take these into consideration when spouses negotiate alimony.
Tax Season 202: Are My Alimony Payments Tax
Posted on: 02-3-2022
If you have recently gone through a divorce and are making alimony payments to your ex-spouse, you may wonder if your payments are tax-deductible. The answer is: it depends.
Changes to taxes brought by the Tax Cuts and Jobs Act of 2017 eliminated the deduction for alimony payments for divorces and legal separations obtained after December 31, 2018.
In addition to the elimination of the alimony deduction, recipients of alimony do not need to report alimony as income if the settlement was agreed to after December 31, 2018.
State laws vary on the matter, but the state of Michigan has declared that no state deduction can be claimed for alimony, nor is it required to be reported as income for divorces settled after December 31, 2018.
Don’t Miss: How To Avoid Paying Alimony In Virginia
How Does The Irs Define Alimony Payments
To qualify as an alimony payment, payments to an ex-spouse must meet certain criteria. Requirements include the following:
- A joint tax return is not filed with your former spouse
- Disbursements are made by cash, check, or money order
- Payments are made for an ex-spouse under a divorce or separation agreement
- Liability for the payment doesnt extend past the death of the ex-spouse
- Payment is not for child support or a property settlement
If all requirements are met, the IRS defines the payments as alimony for tax purposes.
Some Divorce Payments Aren’t Considered Alimony
When the IRS defines alimony, it also specifically excludes certain payments as not qualifying for alimony or separate maintenance treatment. These include:
- Payments to keep up the property of the alimony payer
- Payments for the use of the alimony payer’s property
- Voluntary payments not required under a divorce decree or separation agreement
If a person paying alimony must also pay child support, but they do not fully complete the payment for both, payments would go toward child support first for tax purposes.
If you live in one of the states listed below, consider any property or income held by you and your spouse as community property. Payments that represent your spouse’s portion of community property income are not considered alimony.
Recommended Reading: What Is The Difference Between Alimony And Spousal Support
Speak To A Spousal Support Lawyer Today
When youre requesting or being asked for spousal support, its natural to wonder how long alimony payments last in CA. At the Law Offices of Renkin & Associates, we can answer your questions and assist you in obtaining, modifying, and terminating spousal support orders. For more information about our family law practice or to schedule a consultation, please contact us.
When In Doubt Contact A Divorce Attorney
If you need assistance with filing for divorce or legal separation in Michigan, contact The Gucciardo Law Firm, PLLC. Our attorneys are expertly trained and able to assist you in all areas of family law.
Too much information?
We focus exclusively on family law matters so we are always available to answer your questions and help.
Testimonial
Recommended Reading: States With Highest Divorce Rates
Property Settlements And Qdros
Any initial division of property resulting from divorce is usually considered a tax-free exchange of property by the IRS. The recipient takes on the basis of any property received and pays no income tax upon its transfer. Any type of individual retirement account or retirement plan transferred from one spouse to another under a qualified domestic relations order is also considered a tax-free exchange of property.
How To Avoid Paying High Taxes With Alimony
Deciding how to craft a divorce settlement agreement requires more than simply resolving who wants what property and who gets the kids on the weekends. Divorcing parties must take into account all ancillary consequences of any divorce decision, including insurance coverage, retirement accounts, and taxation. Property distributions, alimony, and child support are all treated differently under the tax laws, and different states, as well as the federal government, have different tax rules from one another. Below, our seasoned New Jersey alimony and divorce attorney offers a few tips on how to limit taxes on the alimony you pay or receive.
Also Check: How Long Is Alimony Paid In Florida
How To Avoid Paying Alimony When The High
Family Code section 4321 states:
In a judgment of dissolution of marriage or legal separation of the parties, the court may deny support to a party out of the separate property of the other party in any of the following circumstances: â¦
The custody of the children has been awarded to the other party, who is supporting them.
Remember we discussed Family Code 4321, above? Well, now you have section .
The reasoning behind this code section should be obvious. If a spouse and parent has sole custody of the child or children, he or she has significant responsibility for their day-to-day care and payment of expenses. This may significantly impact that spouse’s ability to pay alimony.
Can I Move Out Of State To Avoid Alimony Or Spousal Support Payments
If youve signed a contract in Texas agreeing to pay alimony to your ex and you move to Alaska you are still contractually obligated to pay alimony as you contractually agreed. The same holds true for spousal support. If a court in Texas ordered you to pay spousal support to your ex-spouse for a certain period of time, you will still be obligated to pay the spousal support ordered, plus interest.
If the shoe is on the other foot, and your ex moved out of state to avoid paying alimony or spousal support to you, it is critical to contact an attorney right away to discuss your options. While your ex is legally required to pay you the alimony or spousal support owed, people do have a way of disappearing, which may make it difficult for you to collect.
Don’t Miss: How To File For Divorce In Arizona
How Taxes Relate To California Divorce: Support
There are four basic ways taxes have an impact on your California divorce: support, filing status, property division, and dependency exemptions. Heres a brief overview on what you need to know about the relationship between taxes and support.
There are three types of support in California, child support, spousal support , and family support. Each type of support is treated differently for tax purposes, so it is important to pay attention to whether or not the support you are receiving or paying is income or deductible.
Avoid Alimony Front Loading
In this context, front-loading means making advance payments for alimony thats due later. Be sure to understand IRS guidelines against front-loading.
You shouldnt pay excessively high amounts in alimony in the first three years of your divorce. The IRS can tax the excess in the third year of separation.
You cannot deduct alimony payments if you pay a joint tax return with the recipient.
You May Like: El Paso County Divorce Records
How To Avoid Paying Alimony In An Amount Beyond The Marital Standard Of Living
With experienced representation, the spouse with the alimony exposure should calculate alimony consistent with the marital standard of living.
A mistake we sometimes see the higher earner spouse make is to base alimony on his or her higher, current income when that income is not consistent with the marital standard of living.
A spouse who expects to receive alimony is generally not entitled to alimony based on increases in income after separation.
For example, if the most amount of money the spouse who pays alimony received during the marriage per year was $150,000 and now he or she earns $250,000, is it reasonable for the other spouse to receive alimony on that additional amount? The answer in most instances is no.
However, the paying spouse should be diligent ahead of time and before he or she agrees to a court order or goes to trial to properly present or consider these issues in the agreement or to the court. That way, whether by settlement or through a formal hearing, alimony has a reasonable cap or ceiling.
How the marital standard living may apply to your situation is not black or white. Once again, to get answers for your specific situation requires a private consultation with an experienced family law attorney and representation.
How Long Does Alimony Last
The answer to this question depends on the circumstances. The courts calculate alimony timelines based on factors such as the length of the marriage, the ability of the supported spouse to get a job and the age of the recipient. Some alimony orders last weeks or months, while others last years or are indefinite.
Recommended Reading: What To Say To Someone Getting Divorced