Tax rules regarding divorce and separation can and do change so it is important to stay on top of current tax law. The most recent change took effect in 2019 on a federal level. It is important to note that 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. Below are the major federal taxation areas related to divorce.
Who is Impacted
The new rules relate to alimony or separate maintenance payments under a divorce or separation agreement and includes all taxpayers with:
Divorce decrees.
Separate maintenance decrees.
Written separation agreements.
Timing of Agreements
Agreements executed beginning January 1, 2019 or later - Alimony or separate maintenance payments are not deductible from the income of the payor spouse, nor are they includable in the income of the receiving spouse if made under a divorce or separation agreement executed after December 31, 2018.
Agreements executed on or before December 31, 2018 and then modified - The new law applies if the modification does these two things:
Changes the terms of the alimony or separate maintenance payments.
Specifically states that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
Agreements executed on or before December 31, 2018 - Before tax reform, a taxpayer who made payments to a spouse or former spouse could deduct it on their tax return. The taxpayer who receives the payments is required to include it in their income. If an agreement was modified after that date, the agreement still follows the previous law as long as the modifications do not:
Change the terms of the alimony or separate maintenance payments.
Specifically state that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
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.
When the IRS defines alimony, it also specifically exclude 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.
Alimony Tax Reporting
If you have a divorce agreement finalized before January 1, 2019, 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, 2019, 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 income.
Tax reform made an already complicated situation even more so. Don't hesitate to call if you have any questions about the tax rules surrounding divorce and separation.
