Post-divorce, people often wonder if the maintenance they pay or are paid is taxable income. The tax implications of receiving or paying out maintenance are not too confusing; it really just depends on when you had your divorce finalized and if that divorce decree has been modified. If you have concerns about the tax ramifications of paying or receiving maintenance, you should consult with your attorney or a tax professional prior to agreeing to it when filing every year.
Key Takeaways
- The taxability of alimony depends on the date of divorce finalization and any modifications to the divorce decree, with pre-2019 divorces generally making alimony taxable for the recipient and deductible for the payer, while post-2019 divorces do not.
- Alimony aims to balance income disparities between ex-spouses, preventing the lower-earning spouse from falling into poverty, though it is rarely a permanent arrangement.
- For specific tax implications of alimony received or paid, it's crucial to consult with a tax attorney or CPA, especially considering that lump sum alimony payments are also non-taxable and non-deductible.
What is Alimony Really?
Alimony, or spousal support in some jurisdictions, is an attempt by the court to account for one spouse earning a significantly higher income than the other. While most households are dual-income these days, there is usually a measurable discrepancy between one spouse and the other. Alimony is an attempt by the court to not have the lower earning spouse living below poverty level. Alimony is rarely permanent, although it can be permanent for the life of one former spouse in rare circumstances.
Alimony and Taxes
Alimony may be taxable. If your divorce was finalized prior to December 31,2018, alimony would be taxable income for the payee (person receiving the alimony) and could be deducted by the payor.
On January 1, 2019, a new law took effect that affected alimony by both the payor and the payee. According to the IRS.gov website, “divorce or separation instruments executed: (1) after December 31, 2018, or (2) on or before December 31, 2018, but modified after this date, alimony payments are not taxable to the recipient (and not deductible by the payor) if the modification expressly provides that alimony payments are neither includable in nor deductible from, income.”
So, to explain in plain language:
If you got divorced before December 31, 2018, your alimony is taxable and deductible.
If you got divorced on or before December 31, 2018, your alimony may not be taxable IF the final divorce agreement is modified after December 31, 2018, to clearly state that it is not taxable or deductible.
If you got divorced after December 31, 2018, your alimony is not taxable, nor can it be used as a deduction.
How Much Tax Do I Pay on Alimony Received?
In order to get a good idea of how much you have to pay on alimony received, you need to consider your tax bracket, which is adjusted annually. Either consult with a tax attorney or your tax preparer/CPA in order to get the most reliable information and calculate accordingly. Pre-2019, the payor could deduct the alimony payment from their taxes, and the payee would have to declare the alimony as income. Under the post-2019 law, neither party has to do either of these things, so it is no longer a consideration.
Lump Sum Payouts
Sometimes, alimony or spousal support is paid out in a lump sum payment instead of installments over a term. The lump sum payment is still considered alimony and is not taxable or deductible.
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