Filing Taxes After Divorce: Is Alimony Taxable?
Tax season generally falls between January 1st and April 15th each year. During this time, taxpayers prepare and file their income taxes, including information provided by their employers or financial custodians about their generated income. If you pay or receive alimony, you may want to understand how these payments can affect your income tax filings.
What Is a Tax Deduction?
Deductions include expenses that a taxpayer incurs during the year that can be subtracted from their gross income to reduce their tax liability. There are limitations to what expenses are eligible for deductions. The federal Tax Cuts and Jobs Act (TJCA) affected the way alimony payments are taxed for divorced couples whose divorce was finalized after January 1st, 2019.
Alimony & Tax Deductions
Because of this Act, the recipient does not have to include alimony as income, and the payer cannot include payments as a tax deduction if their divorce:
- Was finalized after the aforementioned cutoff date
- Was finalized before the 2019 cutoff but was later modified
Prior to 2019, alimony payors could include spousal maintenance payments as a tax deduction. Under this Act, alimony is non-taxable for the recipient and non-deductible for the payor.
What Is Taxable Alimony?
If your divorce was finalized prior to January 2019, you can still include alimony payments (paid or received) in your tax documents. Whether you pay or receive spousal maintenance, you will need to complete tax documents, including but not limited to a Schedule 1 (Form 1040) detailing the payment amounts as well as the other party’s social security number. You should consult with an experienced accountant to ensure you complete the documents correctly to avoid potential penalties and fines.
According to the IRS, a payment is considered alimony or separation maintenance if:
- The payment is made in cash.
- The payment is made to a spouse or ex-spouse
Payments that are not considered alimony or separation payments include:
- Child support
- Noncash (i.e. checks, cash, or money orders) property settlements
- Any payment made to maintain the payor’s property
- Any payments received as a part of a spouse’s portion of community property income
- Voluntary payments made outside of the obligations outlined in a divorce or separation agreement.
Divorce & Other Tax Considerations
Couples seeking to dissolve their marriage no longer have to consider how alimony determinations will impact their future tax returns. However, the terms of your child custody and property division agreement can impact your taxes. Only one parent can claim a dependent on their taxes each year and claiming a dependent can benefit the filing parent by saving you money (because of the Child Tax Credit, the standard dependent deduction, etc.).
While transferring or dividing assets isn’t generally taxable, you or your ex-spouse may face a large tax bill because of capital gain taxes. A capital gain tax is a tax on any profit gained in the sale of a non-inventory, such as mutual funds, stocks and bonds, real estate property, precious metals, or artwork. An experienced attorney can advise you of potential tax considerations, connect you with a tax expert (who can help mitigate capital gain taxes and/or prepare for the changes to your filing), and work to protect your best interests.
Contact Our Family Law Attorney Today
At Dale L. Bernstein, Chartered Law Office, our alimony attorney is equipped to help clients:
- Understand what type of alimony payment they may be able to receive or asked to pay
- Calculate the potential alimony award
- Understand potential tax consequences or benefits
- Connect with other experts as needed (i.e. forensic accountants, tax accountants or lawyers, etc.)
- Make informed decisions throughout the divorce or separation process