If you’re considering divorce, you should expect to discuss child custody and visitation, child support, property division issues, and spousal support. But did you know that alimony payments may result in unexpected tax issues? Continue reading to learn more.
Alimony (also called separate maintenance or spousal support) is money paid from one spouse to support the other during the divorce proceeding and after the final judgment of divorce. Every state evaluates alimony differently, but typically courts look at a variety of factors to decide whether it’s appropriate in your case. For example, courts will consider the length of your marriage, incomes, ability to earn, each spouse’s age, and in some states, whether either spouse was responsible for the breakup.
The amount of support depends on the specific facts of your case, and it can be temporary or permanent. Some couples opt for a lump-sum payment, which takes care of the paying spouse’s obligation up-front. Other couples will arrange a monthly amount for a set period, such as five years.
Historically, if you paid alimony to your ex-spouse, the law allowed you to deduct the amount you pay on your taxes. However, a new 2017 tax law changes the tax treatment for alimony beginning in 2019 (see below).
For now, while supporting your ex-spouse after divorce is frustrating, knowing that you can deduct the costs later may make it more palatable.
In contrast, currently, the supported spouse must include any alimony received as income on tax filings. Given that the paying spouse doesn’t withhold taxes from the payment, if you’re receiving funds, you’ll need to make sure that you set aside enough money to cover the taxes later.
You can only deduct your alimony payment if it meets specific Internal Revenue Service (IRS) criteria. Some of these factors include:
Examples of payments that do not qualify as alimony, meaning you can’t deduct it on your taxes, includes:
The IRS requires the paying spouse to include the other’s social security number on any tax forms that request an alimony tax deduction. If you are the spouse receiving funds, you must provide your social security number to your spouse, or you risk a penalty from the IRS of up to $50 for noncompliance.
Additionally, if you fail to give your spouse the information needed to get a deduction, your spouse may file a motion in court asking a judge to force you to provide the information. If your spouse incurs legal fees, the judge may require to you reimburse your spouse.
Sometimes the court will order a spouse to make mortgage or tax payments as a form of alimony. If you own the home that you’re making payments on, you may not deduct the amounts in your taxes, even if your ex-spouse lives in the house rent-free. Although you may not deduct the payments as alimony, you can still take advantage of the tax deduction for mortgage loan interest and real estate taxes.
If your spouse owns the home, and you’re paying the mortgage, taxes, or home insurance costs, you may deduct the payments as alimony because it’s for your spouse’s benefit. However, even though you’re paying for the loan interest and taxes, your ex-spouse can take advantage of the deductions because it’s that spouse’s primary residence.
In most cases, if you and your spouse co-own the home, typically you can deduct one-half of your loan, insurance, and real estate taxes as alimony. Your spouse must report the same amount as income. Additionally, you may both claim the mortgage interest, taxes, and insurance as deductions if your home meets the IRS criteria for a qualified home.
In 2017, President Trump passed a new tax law that dramatically affects spouses paying (and receiving) alimony after a divorce. If you finalize your divorce after December 31, 2018, and you receive spousal support payments, you no longer must report it as income. If you’re paying alimony, unfortunately, you can no longer deduct the payments from your taxes. Because the tax law hasn’t gone into effect yet, there’s no way to know the impact of this new law. However, given that alimony is generally thousands of dollars per year, it’s easy to assume that the tax ramifications could be monumental.
If you’re reading this as a spouse who will receive alimony after the new tax law becomes effective, don’t be too quick to rejoice that you don’t have to report the extra income on your taxes. Because your spouse will pay significantly more in taxes on your alimony, what you receive in the end will likely be drastically less than you expect.
The new tax law is likely going to create more resistance when it’s time to discuss alimony in divorce negotiations. Because there’s going to be a substantial increase in the cost of paying spousal support, a paying spouse may fight harder to eliminate alimony after the divorce. Additionally, states are going to need to revamp spousal support formulas to reflect the increase due to taxes. If your state doesn’t have a set formula, you should expect that your judge will alter the final award to make room for the extra money your spouse is paying in taxes.
If you're already divorced, or you expect that the judge will finalize your divorce by midnight December 31, 2018, the new tax law will not affect you, even if you modify it later.
