Tax pain & alimony payments for US expats - is alimony Taxable?

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.

How the IRS defines alimony payments

The IRS treats a payment to your former spouse as alimony if:

• You paid separate maintenance to your ex-spouse in compliance with a court order under a divorce or separation agreement.
• You don't share the same household or use the same legal address.
• You can no longer file a joint tax return.
• You don’t intend for the payment to cover child support or property settlement.
• You made all the payments in cash.

There was a time when alimony was tax deductible for payers and income for the receivers. This meant the payers were able to reduce their taxable income while receivers were taxed on it.

This is now applicable to only divorces finalized till Dec 31, 2018.

For divorces executed on or after January 2019, there is neither a tax benefit for the spouse paying the alimony nor the income reporting requirement for the spouse receiving it.

NOTE! That modification to the original agreement may change the tax consequences of alimony payment. Make sure you seek advice from a pro-grade tax specialist.

Some divorce payments aren't considered alimony

Alimony, also known as separate maintenance, is not the only payment made under the divorce or separation agreement.

So, it is essential to distinguish between them. Each has a different tax consequence.

The IRS doesn’t include every payment you receive from your ex-spouse who pays the alimony as separate maintenance.

The following payments you receive from your former spouse are not considered alimony:

• Non-cash property settlement, either paid in lump sum or installments.
• Child support. Let’s say your ex-spouse is required to pay you $5,000 for child support and $15,000 for alimony. But you actually received $8000. The $5000 will go to child support and the remaining $3000 will be considered alimony.
• Payments that are your spouse’s part of community property income.
• Use of your ex-spouse's property.
• Any Payments you receive from your ex-spouse to keep up their property.
• Any voluntary payments you receive from your ex-spouse. These include payments that your ex-spouse is not legally bound to pay you but still does.

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

a) 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 $50 penalty.

b) 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 $50 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.