When you’re thinking about filing taxes after a divorce, you may want to know how your taxes will change. The federal tax impacts of divorce aren’t as large as they used to be.
Each state has its own state income tax laws. How divorce-related payments and income are treated differs from state to state. Refer to your state’s taxation authority to see how your state’s tax laws will impact you.
Here are the major federal taxation areas related to divorce.
How The IRS Defines Alimony Payments
To qualify as alimony or separate maintenance, the payments you make to your former spouse must meet all six of these criteria:
• You don’t file a joint tax return with your former spouse.
• You make payments in cash, by check, or by money order.
• You make payments to or for a spouse or former spouse under an applicable divorce or legal separation agreement.
• Legally separated spouses cannot be part of the same household when making payments.
• Liability for the payment doesn’t extend beyond the death of the spouse who receives payments.
• The payment is not child support or a property settlement.
• Some divorce payments aren’t considered alimony
When the IRS defines alimony, it also specifically excludes certain payments as not qualifying for alimony or separate maintenance treatment. These include:
• Child support
• Non-cash property settlements
• Payments to keep up the property of the alimony payer
• Payments for the use of the alimony payer’s property
• Voluntary payments not required under a divorce decree or separation agreement
If a person paying alimony must also pay child support, but they do not fully complete the payment for both, payments would go toward child support first for tax purposes.
If you live in one of the states listed below, consider any property or income held by you and your spouse as community property. Payments that represent your spouse’s portion of community property income are not considered alimony.
Is Spousal Support You Receive Taxable?
If you receive spousal support, you must report the payments as income and pay taxes on the money. Spouses need to plan for the potential tax impact of the income. Unlike an employer, your former spouse won’t withhold any taxes from your support check. If you’re staying at home to care for young children and have no other source of income, paying estimated tax each quarter (to both the IRS and your state) may be a good way to avoid taking a tax hit at the end of the year. If you have a paying job, then increasing withholding from your paycheck is another way to offset the potential impact of support payments.
You may need to spend some time looking at different payment scenarios and how they play out tax-wise by calculating what your tax liability would be if you received a certain amount of support and what benefit your spouse would receive from the tax deduction. You can check your potential tax liability on the IRS website at www.irs.gov, where tax tables are available. Or you can ask a tax professional to help you look at the tax impact of different amounts of support so that you can figure out the optimal amount—that is, the amount that puts the most money in each person’s pocket after taxes.
The IRS offers many publications that may help you as you negotiate support. There’s a chapter specifically on alimony, and IRS Publication 505, Tax Withholding and Estimated Taxes, is one, and IRS Publication 504, Divorced or Separated Individuals, is another. The IRS treats payments made to third parties on your behalf as though you received them—you have to include them in your taxable income. So, for example, if your former spouse pays the mortgage directly (and this is provided for in your marital settlement agreement or court order), you must report that amount as income. Spouses can split the difference between the new tax changes, and a paying spouse can argue that paying less spousal support is fair to both spouses.
Where To Report Alimony On Your Tax Return
If you have a divorce agreement finalized before January 1, 2021, reporting alimony paid and received on your tax return is easy. You simply input alimony paid or received on Form 1040, Schedule 1.
If you’re the person receiving alimony payments: You will enter the amount on line 2a. On line 2b, you must input the date of the original divorce or separation agreement. You’re also required to give your Social Security number to the alimony payer, or you may face a $50 penalty.
If you’re the person making alimony payments: You’ll enter the amount paid on line 18a. Alimony payers are also required to input the recipient’s Social Security number on line 18b, and the date of the original divorce or separation agreement on line 18c. If you do not include the recipient’s Social Security number, you may be subject to a $50 penalty.
People with divorce agreements dated January 1, 2021 or after do not have to include information about alimony payments on their federal income tax returns. If you’re required to report alimony income on your tax return and you forget to include this information, you’ll be subject to the usual penalties and interest payments for underreporting your tax.
Claiming a dependent on your tax return depends on many factors. The custodial parent will generally claim the dependent, but the custodial parent for tax purposes might not be the same person who has legal custody. The custodial parent for IRS purposes is the parent whose house the child sleeps at the most number of nights during a year.
In certain cases, the non-custodial parent may claim the dependent if they meet the following four requirements:
The parents are:
• Divorced or legally separated under a decree of divorce or separate maintenance
• Separated under a written separation agreement
• Living apart at all times during the final six months of the year
• The child in question received over 50% of their support during the year from their parents
• The child is in the custody of one or both parents for more than 50% of the year
The custodial parent signs Form 8332 declaring that they won’t claim the child as a dependent for the year and the non-custodial parent attaches the written declaration to their return for divorces occurring after 1984
Even if a non-custodial parent can claim the dependent on their tax return, claiming the child will not provide any advantage for certain tax benefits of the non-custodial parent. These include:
THE RULES OF ALIMONY AND TAXES
Until recently, the IRS allowed paying spouses to deduct alimony payments and required recipients to report it as income. However, the rules have changed for any divorce finalized on or after January 1, 2019.
The Date of Divorce Matters
If you finalized your divorce before January 1, 2019, the spouse paying support may report the payments as a tax deduction, and the recipient must report and pay taxes on the alimony as income (unless your support agreement or order says otherwise). For couples whose divorce was pending on or after January 1, 2019, the Internal Revenue Service (IRS) no longer treats spousal support payments as income to the spouse who receives it, nor does it allow the paying spouse to take a tax deduction for the amount of alimony paid each year.
Reporting Income and Submitting Tax Deductions for Spousal Support Orders Created Before January 1, 2019
If spouses follow certain rules, the IRS allows the paying spouse an alimony deduction for tax reporting purposes. In turn, the recipient must report the alimony payments as income. In many cases, this results in tax savings for both spouses—they are shifting income from a higher to a lower tax bracket by transferring alimony from the higher-earning spouse to the lower-earning one. The high earner saves money that would otherwise go to the IRS. The recipient’s tax bracket doesn’t usually change as a result of the alimony payments, and the payor is sometimes more generous because of the tax savings.
Example. If the higher earner has a taxable income of $200,000 a year and pays the other spouse alimony of $80,000 a year, the higher earner will owe income tax on $120,000, not $200,000. The recipient might pay taxes of $16,000 on the $80,000. The payor saves more than that. The payor, who would have paid about $50,000 on $200,000 of income, now pays only about $24,000 on annual income of $120,000. Between the two, they are paying a total of $40,000, or $10,000 less, than the higher earner would have paid before deducting the alimony payments.
Most people want to make alimony tax-deductible. You do, however, have a choice, and for some couples, the tax consequences are more favorable if they make payments nondeductible and nontaxable because of the tax consequences. A tax expert can tell you which course is right for you.
Making Sure Payments Are Tax-Deductible
However, not all alimony payments qualify as deductions. The IRS imposes seven requirements on taxpayers seeking to deduct alimony payments: Make payments in cash or by check. You must pay alimony by cash or check for the benefit of a spouse or former spouse. The value of in-kind alimony—for example, giving your spouse your car—isn’t deductible.
Follow the documents and designate payments as tax-deductible. Make payments in accordance with a divorce document, such as a marital settlement agreement, separation agreement, court order, or divorce judgment. Payments made under a temporary support order also qualify. (Section 71 of the Internal Revenue Code.) Just make sure your documents state the amount to be paid and describe it as alimony, spousal support, or spousal maintenance. The documents should also clearly label the payments as deductible by the payor spouse and taxable to the recipient spouse.
Don’t characterize payments as child support or a part of a property settlement. Child support payments, unlike alimony, are never tax-deductible. So be sure that alimony payments are not tied in any way to support of your children. For example, if you agree that alimony will end when your child becomes an adult, you run the risk that the IRS will reclassify past alimony as nondeductible child support. The IRS would disallow your past alimony deductions, and you would owe back taxes. Similarly, if the IRS views your payment as part of your division of marital property, it’s not tax-deductible.
Specify that payments end at the recipient’s death. The marital settlement agreement or judgment must provide that alimony payments terminate when the recipient dies. (The document can also ensure that the alimony obligation ends when the payor dies.) Most payors also have the right to terminate alimony if the recipient remarries.
Live apart. If you are still living with your spouse or former spouse, alimony payments are not tax-deductible.
You must make payments after physical separation for them to qualify as tax-deductible.
Don’t file a joint tax return. If you and your spouse file a joint income tax return, you can’t deduct alimony payments.
Don’t pay extra upfront. Make sure to follow IRS rules against front-loading—the advance payment of alimony that’s due later. Alimony should not be excessively high or front-loaded in the first three post-separation years. Excessive payments are subject to recapture or being taxed to the payor in the third post-separation year.
The Tax Cuts and Jobs Act Impact on Spousal Support Orders on or After January 1, 2021.
Regardless of when you filed for divorce if a judge finalized it on or after January 1, 2021, the Tax Cuts and Jobs Act (TCJA) will impact your spousal support orders. The TCJA ended the tax deduction benefit and reporting requirements for support until at least 2025 (or, after 2025 until Congress changes the law.) The IRS now treats all alimony payments the same as child support—meaning, there’s no deduction or credit for the paying spouse and no income reporting requirement for the recipient.
Divorce is an adversarial process already, and the new tax changes are likely to cause more issues moving forward. In the past, paying spouses were less likely to fight over spousal support payments because that spouse would receive a credit for any money paid to the recipient, and the recipient would pay taxes on the income. Now, however, paying spouses often feel as though the new law rewards the recipient spouse with a financial windfall—large, monthly payments that don’t count as income.
For example, if a paying spouse earns $60,000 per year and the recipient earns $40,000 per year, the court may order spousal support payments to balance out each spouse’s finances. If the paying spouse sends the recipient a total of $10,000 per year in alimony, the result is that both spouses receive a total of $50,000 per year. In the past, the paying spouse would ask the IRS for a tax deduction for the $10,000 paid while the recipient would report and pay taxes on the income.
Under the new Utah tax law, the paying spouse is still responsible for paying taxes on the full $60,000 (even though that spouse is keeping only $50,000), and the recipient only pays taxes on the $40,000 earned (despite receiving an additional $10,000 in income.) As a result of the new tax law, paying spouses will likely negotiate to pay less in spousal support to make up for the loss of the tax deduction and “windfall” for the recipient not reporting the income.
If you’re going through a divorce and alimony is an issue, it’s important to speak with an experienced family law or tax law attorney before you settle or ask the court to decide the alimony issue for you. Paying spouses must evaluate the impact of paying spousal support on their annual income and how the payments will impact the recipient.
Is Alimony Always Tax Deductible to the Paying Spouse?
When you’re negotiating with your spouse or arguing in court about the level, type, and duration of spousal support (also called “alimony” or “spousal maintenance”), tax issues should never be far from your mind. One of the most frequent questions during divorce negotiations is, “do you pay taxes on alimony?” This article explains the basic rules and significant concerns for each spouse—but you may need some assistance in making decisions about support, as discussed below.
Alimony Tax Rules for Divorces Before 2021.
The old tax rules still apply if your divorce agreement was executed or your divorce decree was issued in 2018 or earlier. Alimony is still considered taxable income for the recipient, and it’s still tax deductible for the payer under the same rules.
Payers must still meet certain requirements for these payments to qualify as deductible alimony.
The new rules also apply if a decree or agreement is modified after Dec. 31, 2018, and the modification states that the repeal of the alimony deduction applies to the modification.
Reporting Alimony You’ve Received as Income
Enter the full amount of any alimony you received on line 2a of the 2021 Schedule 1 with your 2021 Form 1040 to report alimony you received as income if you were divorced within the time frame when you must do so. Alimony includes what is sometimes called “separate maintenance”—income received if you were legally separated but not yet technically divorced. It does not include:
• Child support
• Non-cash property settlements
• Payments that represent community property income
• Use of the payer’s property
• Voluntary payments that aren’t required by the divorce decree or agreement
The total of Part I, “Additional Income,” of Schedule 1 transfers to line 8 of the 2021 Form 1040.
Child support is considered a non-taxable event. It’s not reported on your federal tax return, and the parent paying it can’t claim it as a tax deduction.
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