Is alimony taxable: Tax pain & alimony payments for US expats

When you go through a divorce, you and your ex-spouse will need to come up with an agreement to fairly divide your assets.

Since marriage is really a financial partnership, the divorce should ideally split everything in half.

A big part of this process could be to decide on alimony payments.

If you’ve agreed on alimony payments, it’s important to figure out how they will affect your taxes because this can be a situation that gets some taxpayers into trouble.

What is alimony?

Alimony is regular payments from one ex-spouse to another. Alimony usually is part of a divorce when one spouse earns more than the other during a marriage.

The idea is that the spouse with less income was financially dependent on the earning spouse and would take a significant lifestyle hit without extra money.

Alimony payments are there so that both parties maintain about the same lifestyle after a divorce.

Is alimony tax deductible?

With the new law in effect, taxpayers are wondering “is alimony taxable or tax deductible”.

Whether or not the amount of alimony is tax deductible will depend on when your divorce got finalized.

The Tax Cuts and Jobs Act (TCJA) introduced a change in the tax treatment for alimony paid under a divorce agreement executed on or after Jan 1, 2019, according to which the alimony became no longer tax-deductible.

The date of divorce matters

How the alimony is treated for tax purposes is determined by the date of divorce. Let’s say you filed for divorce on April 1, 2018 and the judge finalized it in February 2019.

The alimony doesn’t qualify for a tax deduction in this case.

The previous law offered an alimony tax deduction to the former partner paying the alimony. But the recent changes in the law have no such tax incentive.

Alimony (or - separate maintenance) taxation

We are going to look at how alimony works as well as find out if spousal support is taxable.

The alimony and separate maintenance can be paid for by either partner. There are 3 questions that need to be answered:

1. Who will pay the alimony?
2. How much alimony needs to be paid?
3. For how long the alimony will be paid?

The partners can mutually decide on them or use a mediator to answer all the above questions.

However, if no decision can be reached then the court will decide based on the circumstances of each couple, their need for financial support, and their respective earnings.

NOTE! Each state has its own laws which need to be considered while making decisions with respect to alimony.

What qualifies as alimony?

Not all payments made to a former spouse qualify as alimony for tax purposes.

To meet the IRS definition, payments must adhere to these criteria:

1. Made under a divorce or separation agreement: Payments must be part of a formal agreement such as a divorce decree or a separation agreement.
2. Not designated as non-alimony: The agreement must not explicitly state that the payment is not alimony.
3. In cash or cash equivalent: Payments must be made in cash, check, or money order. Property transfers or services do not qualify.
4. Recipients must be separate: The payer and recipient cannot be members of the same household when the payment is made if they are legally separated.
5. Ceases upon death of recipient: Alimony obligations must terminate if the recipient passes away.
6. Not child support or property settlement: Payments labeled as child support or those made as part of a property settlement are not considered alimony.

Why understanding this matters: Ensuring your payments meet these IRS criteria is critical for compliance and to avoid penalties or audit risks.

State tax treatment of alimony

While federal tax law provides clear rules for alimony payments under the Tax Cuts and Jobs Act (TCJA), state tax laws may differ significantly.

Here’s what you need to know:

Pre-2019 vs. post-2019 agreements:

• Some states, like California, allow deductions for alimony payments and consider alimony as taxable income for recipients, even for agreements finalized after 2018.
• Other states align with federal rules, making alimony non-deductible for the payer and non-taxable for the recipient under post-2018 agreements.

Variations in state laws:

• New York: Generally aligns with federal rules but may have additional requirements for reporting alimony.
• Massachusetts: Applies federal guidelines for alimony finalized after 2018 but has specific conditions for state tax filing.
• Texas: As a no-state-income-tax state, alimony payments have no state-level tax implications.

Why is this important? Depending on where you live, state-level rules can significantly impact your financial planning.

How modifications to Pre-2019 agreements impact alimony taxation

The Tax Cuts and Jobs Act (TCJA) introduced significant changes to the tax treatment of alimony for divorce agreements finalized on or after January 1, 2019.

However, modifications to pre-2019 agreements can also bring these new rules into effect under certain circumstances:

When the new tax rules apply

If a divorce or separation agreement executed before January 1, 2019 is modified after December 31, 2018, and the modification explicitly states that the TCJA rules apply, the alimony payments will follow the new tax treatment:

• The payer can no longer deduct alimony payments.
• The recipient does not report the payments as taxable income.

When the old tax rules remain

If the agreement is modified but does not explicitly adopt the TCJA rules, the original tax treatment remains:

• The payer may deduct alimony payments on their federal return.
• The recipient must report alimony as taxable income.

Why this matters

• Choosing to opt into the new rules can have long-term financial and tax implications for both parties.
• For the payer, the loss of the deduction can increase their tax liability.
• For the recipient, avoiding taxable income can provide a financial benefit, particularly if they are in a lower tax bracket.

How to report alimony for my taxes?

How you will report your alimony will be based on the following factors:

• Your divorce finalization date,
• Whether you are the receiver or payer.

Let’s dive into what it looks like pre and post-2019.

Reporting for divorces finalized pre-2019

Receiver

If you receive the alimony then you will report it as income on Form 1040 or Form 1040-SR and attach Schedule 1 with it. Provide the following details:

• The amount of alimony - on line 2a;
• The date of the original divorce or separation agreement - on line 2b;
• Provide the SSN of the alimony payer.
  NB! Failure to do so will result in a penalty.

Payer

If you paid the alimony then you will claim it as a deduction on Form 1040 schedule 1. Provide the following details:

• The amount paid - on line 19a;
• Recipient SSN - on line 19b.
  NB! Failure to do so will result in a penalty.
• Date of original divorce or separation agreement on line 19c.

You might be asking “what happens if I don’t claim alimony on my taxes?”

As a payer, you won’t get any tax benefit. This would result in more taxable income which will increase your tax liability.

NOTE! As a receiver, you are supposed to report it as income. If you don’t, then the IRS may impose a penalty on you for underreporting income.

Reporting for divorces finalized post 2019

Post-2019 the alimony is treated like a child support payment.

Do you pay taxes on child support? - No.

Similarly, alimony is neither a taxable income nor tax deductible for couples if the divorce agreement is dated January 1, 2019, or after.

Bonus - What is a recapture rule?

The tax benefit enjoyed by the payer is reversed when the IRS imposes the recapture rule. You need to be aware of two things:

1. 3-year rule

The recapture rule is triggered if the alimony payment increases or decreases within the first 3 years starting from when you first become liable to make the alimony payment under the court order.

2. $15,000 cap

You may be subject to the recapture rule if the alimony you paid is more than $15,000 from one year to the next.

The table below illustrates two scenarios-examples with respect to alimony payments.
 

Year	First scenario	Second scenario
1st year- Payment	$24,000	$100,000
2nd year- Payment	$12,000	$50,000
3rd year-Payment	$0	$0

 

The alimony payments in the first scenario remained within the threshold of $15000 and therefore no violation happened.

The second scenario has a clear violation and the tax benefit of the alimony payment will be reversed. The payer will be subject to the recapture rule and will be liable to pay tax.

You can prevent yourself from a recapture rule by making sure that:

• You split your settlement amount into equal parts.
• Your alimony payment doesn’t vary from the specified limit of $15,000 within the first 3 years.
• You avoid paying the alimony in lumpsum amounts.

NOTE! Remember to check in with the specific state income tax laws or have consultation with a tax professional.