When a married couple goes their separate ways, it’s not uncommon for alimony payments to be included as part of the divorce settlement. Decades ago, the husband was responsible for providing the spousal support. However, a Supreme Court ruling in 1979 (Orr v. Orr) determined that alimony should be gender-neutral. Regardless of who pays and receives the support, one common question always arises: “Who pays taxes on alimony payments?”
Alimony Rules 2018 and Earlier
If you were legally divorced by December 31, 2018, the rules for taxes on spousal support differ from the current tax laws. For all existing divorce settlements prior to 2019, the payer can deduct all alimony payments from their federal income taxes. The ex-spouse who receives the support must report the alimony payments as income when filing.
It’s important to note that this only applies to federal income taxes as each state has its own rules concerning the treatment of spousal support. California, for example, still follows the pre-2019 tax treatment for alimony payments, allowing the payer to take the deduction and requiring the recipient to pay state income taxes on the support.
Who Pays Taxes on Alimony Payments Now?
The Tax Cuts and Jobs Act of 2017 radically altered the way new alimony payments are taxed by the IRS. For divorce agreements finalized, or substantially modified, on or after January 1, 2019, the following rules apply:
- The payer (the person making payments) can no longer deduct alimony payments from their federal income tax return. Instead, they are responsible for paying the taxes on that income before transferring it to their ex-spouse.
- The recipient (the person receiving the alimony money), on the other hand, gets it tax-free at the federal level. They do not have to include it in their taxable income.
Of course, as we mentioned earlier, there could still be different tax treatment for both the payer and receiver at the state level.
Which Payments Count as Spousal Support
An important thing to remember when it comes to taxes and alimony is that not all divorce payments count as spousal support. The alimony tax rules only apply if the following guidelines are met:
- You were legally married and qualified to file a joint return.
- You are now legally separated or divorced (can’t file a joint return).
- The support payments are enforced by a legal divorce settlement/agreement.
- The payments must be made in cash or a cash equivalent (check, money orders, etc.).
- You are no longer residing with your ex-spouse.
- Payments are issued to and on behalf of the ex-spouse.
- The payments will cease if the recipient dies.
Any payments made for child support or other obligations not outlined in the divorce agreement do not qualify as spousal support (alimony) payments.
Conclusion
Understanding the tax implications of alimony payments is essential for both payers and recipients. Remember to consult with a tax professional to ensure you are adhering to the correct federal and state tax laws. This will ensure that you remain compliant and avoid any unwanted tax surprises.