The answer to the question is alimony tax deductible is relative. What was once a straightforward answer has become a little more complex. Tax deductions for alimony are possible, but only in certain conditions in the Tax Cuts and Jobs Act (TCJA) are met.
One of the most significant modifications impacts alimony and child support and how the IRS handles the tax implications of alimony. The TCJA took effect on January 1, 2019, and divorcing spouses must familiarize themselves with the new laws before reaching a spousal support settlement.
Until recently, spousal support payments were deducted by the paying spouse, and the recipient had to disclose them as earnings for tax purposes. The rules, however, have changed. The deductibility of alimony in %%currentyear%% will be determined by a number of criteria, as detailed below.
Is Spousal Support Taxable?
If you want to know if spousal support is taxable, the simple answer is, that alimony is no longer deductible. This can reduce the number of people who don’t want to pay alimony due to the new tax laws explained below.
TCJA And The Date of Divorce Rules
President Donald Trump signed substantial tax changes into law on December 22, 2017 – the Tax Cuts and Jobs Act (TCJA). It is the most important tax reform in the United States in decades, and the reforms had a considerable impact on spousal support (alimony) taxes.
Implications of The Tax Cuts And Jobs Act
Spousal support is taxable (if concluded after the TCJA), but child support and property distributions are not.
The IRS examines support payments made in the first three years to ensure that you didn’t claim property distribution or other post-divorce responsibilities as taxable support, such as lawyers’ fees.
The IRS can “recapture” retroactive taxes if the divorce agreement calls for higher payments in the initial post-divorce years and smaller payments thereafter, and the IRS considers the early payments are in place of property division or other nonsupport items.
If your divorce agreement asks for a spousal support reduction of $9,000 or more in the second or third year after your divorce, Uncle Sam may come knocking on your door to talk recapture.
Other TCJA Changes in the Divorce Process
The TCJA clarified many issues regarding the alimony tax deductible question. Here we outline them.
Parties in a divorce could claim dependency exemptions for their children before the TCJA was signed into law. These acted as a tax break by lowering a person’s taxable income. Exemptions for dependents are no longer available.
Child Tax Credits
The best part is that you can claim a $2,000 tax credit for every child under the age of 17. If you are still paying child support for a kid over the age of 17, you may be eligible for a $500 child tax credit.
Going by the TCJA, couples can no longer deduct divorce-related expenses such as legal fees as they could a few years ago. Such fees are considered personal expenses per the law, therefore making alimony tax deductible to seize.
Spousal Support Orders Before January 1, 2019
If your divorce was finalized before January 1, 2019, the paying spouse can claim the amounts as a tax deduction, but the receiver must report and pay taxes on the alimony (unless your support agreement or order says otherwise).
Spousal Support Orders After January 1, 2019
The Internal Revenue Service (IRS) no longer recognizes spousal support payments as income to the receiving spouse, nor does it allow the paying spouse to deduct the amount of alimony paid each year for couples whose divorce was pending on or after January 1, 2019.
When Alimony Can Be Tax-Deductible
If your alimony is tax deductible, you can subtract the amounts even if you don’t itemize them. To claim your deduction, use IRS Form 1040, not Form 1040A or Form 1040EZ. The alimony recipient’s social security number must be provided.
For decrees entered before 2019, alimony payments may result in tax benefits for both parties, hence not possible for alimony tax deduction to be possible.
First, it reduces the amount of money paid to the IRS by shifting the paying spouse’s income to a lower tax bracket. The recipient’s tax bracket, on the other hand, is unaffected. The following rules must be followed in order to qualify for an alimony tax deduction.
Pay Alimony in Cash or by Check
To claim a tax deduction, the higher-earning spouse must pay alimony in cash or cheque. If you provide spousal support in kind, such as by giving your spouse goods or services, it is not deductible.
Avoid Alimony Advance Payments
This refers to making payments in advance for alimony that is due later. Make sure you’re aware of the IRS’s prohibition on front-loading.
In the first three years after your divorce, you should avoid paying exorbitant alimony. In the third year after separation, the IRS can tax the surplus. So it’s important to keep the proof of alimony payments.
If Physically Separated
Any alimony payments you make are not tax deductible if you have finalized your divorce but still live with your former spouse. When you live in separate dwellings, you can only claim alimony as a deduction.
Pay Alimony Independent of Other Payments
Alimony payments can be declassified as tax-deductible if they are tied to other commitments related to your divorce. Child support payments, for example, are not tax-deductible.
You can’t claim a tax deduction if alimony is tied to child support. Similarly, combining alimony with the amount paid in marital property distribution makes the entire payment non-deductible.
When Alimony Is Non-Deductible
From 2019, the TCJA had a substantial influence on the incomes of those who signed divorce settlements. Here’s how today’s tax changes affect people who pay or receive alimony.
Joint Tax Return Restriction
Depending on the state laws, if you file a combined tax return with the recipient, you cannot deduct alimony payments. This means spousal support is not taxable.
In most circumstances, the new law appears to benefit persons who receive spousal assistance. Alimony payments are no longer required to be declared as income by the IRS. As a result, they do not pay tax on it.
Individual Retirement Accounts (IRAs)
A person who takes money out of their IRA to pay alimony receives a tax benefit. According to the new tax rules, the IRS does not tax such funds when they are withdrawn.
However, the legislation limits how alimony recipients can save for retirement. The reason for this is that alimony payments cannot be put into an IRA. People who rely solely on alimony payments may have difficulty saving for retirement.
The recipient’s taxable income is reduced by not declaring alimony as income. It could influence their eligibility for social benefits. For example, if your income is lower, you may be eligible for better healthcare subsidies.
From this article, it’s now very clear to those wanting to know if alimony is tax-deductible or taxable. In simple terms, alimony is no more tax-deductible since 2019.
The reason for this is because of the TCJA signed into law by President Trump, which brought major changes to taxation. And don’t forget the consequences of not paying alimony.