Alimony and Taxes
The federal government now takes a bigger chunk of taxes from the paying spouse, which changes the spousal support and tax consequences of paying spousal support.
Federal lawmakers dramatically changed the tax consequences of alimony or spousal support with tax reform laws in 2018. The earlier law allowed a person paying spousal support to claim a federal income tax deduction while the receiving spouse had to claim the spousal maintenance as taxable income. This deduction saved the payer money on their income taxes by making alimony payments. But Congress got rid of the tax deduction for couples who divorced in 2019 or after.
Some divorce lawyers believe that the new rules which ended the alimony deduction for the spousal maintenance payer makes it more challenging to negotiate divorce agreements.
The Spousal Support Tax Rule Change
The change went into effect on Jan. 1, 2019. The spousal support payer can't take a federal income tax deduction for their payments when they divorce or separate after this date. The spousal support-receiving spouse doesn't have to pay federal income taxes to the IRS on the amount of alimony they receive.
The new rule doesn't apply to everybody. Former spouses are under the old law if they divorced or signed a separation agreement before Jan. 1, 2019, and meet specific requirements. For qualifying divorces, the spousal maintenance payer can continue to take a federal income tax deduction for as many years as the payments continue under their divorce decree or alimony agreement. But, the alimony payments are treated as taxable income for the person who receives the payments. This means the ex-spouse receiving the spousal support payments must pay taxes on that money.
What It Means for Spousal Support Recipients
The new rule can have pluses and minuses for those who get spousal support. The good news is the receiving spouse no longer must pay taxes on their spousal support payments. However, negotiating a divorce settlement may be more difficult because the rule will cost the paying spouse more money in taxes for the alimony payments to the receiving spouse. An experienced divorce attorney can provide legal advice when negotiating a divorce settlement involving potential alimony payments.
How does that work? Consider a spouse who pays $30,000 in spousal support and whose income is taxed at 32%. A tax deduction for paying spousal support would save this spouse almost $10,000 in taxes. Under the new rule, the payer can no longer take this deduction.
Are There Any Tax Benefit Alternatives?
After Congress cut the spousal support tax deduction, creative accountants have looked for ways around it. Sometimes, it may save the paying ex-spouse money by making the payments from an individual retirement account (IRA). You may also be able to arrange for a lump sum payment of your support obligation to your ex-spouse, which could save you money in the long run for tax purposes.
Spousal support may be treated differently on your state tax return than it is by the IRS. Talk to a local attorney for any questions about how your state tax laws treat spousal support payments.
Divorces Before 2019 Can Still Qualify
If you divorced before 2019, you might still be able to take the spousal support tax deduction. But be cautious about changing your alimony agreement. You wouldn't want to lose your spousal support tax deduction benefit accidentally. Before making changes to a pre-2019 divorce agreement or alimony agreement, it is best to consult a divorce attorney with expertise in tax matters and the potential tax implications for you if you make any changes.
Even if you divorced or separated before 2019, you wouldn't qualify for a spousal support tax deduction unless you meet all the requirements set out by the Internal Revenue Service (IRS), including:
- You don't file a joint income tax return with your former spouse
- Your spousal maintenance payment is in cash (including checks or money orders)
- The divorce or separation agreement does not say the payment is not spousal support
- Your payment is not treated as a child support payment or a property settlement
- The payer is not required to make spousal support payments after the death of the receiving spouse
- If legally separated under a divorce decree or separate maintenance, you and your former spouse are not members of the same household when you make the alimony payments
Problems With Alimony and Taxes? Get a Lawyer's Help Today
Taxes and divorce are complicated subjects, and they become more complex when they're mixed together. If you have questions about spousal maintenance/alimony payments and tax consequences, contact a local divorce attorney to discuss your specific situation and get personalized legal advice.
Can I Solve This on My Own or Do I Need an Attorney?
- You may not need an attorney for a simple divorce with uncontested issues
- Legal advice is critical to protect your interests in a contested divorce
- Divorce lawyers can help secure fair custody/visitation, support, and property division
An attorney is a skilled advocate during negotiations and court proceedings. Many attorneys offer free consultations.
Don't Forget About Estate Planning
Divorce is an ideal time to review your beneficiary designations on life insurance, bank accounts, and retirement accounts. You need to change your estate planning forms to reflect any new choices about your personal representative and beneficiaries. You can change your power of attorney if you named your ex-spouse as your agent. Also, change your health care directive to remove them from making your health care decisions.