Is Alimony an Itemized Deduction on Your Taxes?

The tax treatment of alimony hinges on the date of the divorce or separation agreement. For agreements finalized after December 31, 2018, the Tax Cuts and Jobs Act (TCJA) eliminated the federal tax deduction for alimony payers. This change means that whether you can deduct alimony is dictated by the timing of your legal agreement.

For those with older agreements, alimony payments may be deductible, but this is not an itemized deduction. Instead, it is an “above-the-line” deduction, a category that directly reduces a taxpayer’s adjusted gross income. The distinction is significant, as this type of deduction is beneficial even if a taxpayer does not itemize and takes the standard deduction.

Federal Tax Rules Based on Agreement Date

The federal government’s approach to taxing alimony is split into two distinct timelines, with the Tax Cuts and Jobs Act of 2017 creating a clear dividing line. The tax implications for both the payer and the recipient of alimony are entirely dependent on when their divorce or separation instrument was legally executed.

For Agreements Executed On or Before December 31, 2018

If your divorce or separation agreement was finalized on or before December 31, 2018, the previous tax rules continue to apply. Under this system, the spouse paying alimony can deduct the full amount of the payments from their income. This is an “above-the-line” deduction, which is claimed on Schedule 1 of Form 1040 and reduces the payer’s adjusted gross income (AGI).

To claim this deduction, the payer must include the recipient’s Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) on their tax return. Failure to do so can result in the disallowance of the deduction and potential penalties. Correspondingly, the spouse receiving the alimony payments must report them as taxable income.

It is possible for these “grandfathered” agreements to be brought under the new rules. If a pre-2019 agreement is legally modified after 2018, the new rules do not automatically apply. However, if the modification document explicitly states that the TCJA rules should apply going forward, the payments will cease to be deductible for the payer and will no longer be taxable income for the recipient.

For Agreements Executed After December 31, 2018

For any divorce or separation agreement executed after December 31, 2018, the TCJA has reversed the long-standing tax treatment of alimony. Under these new regulations, alimony payments are no longer deductible by the paying spouse for federal tax purposes. The payments are now considered a personal expense, paid with after-tax dollars.

Because the payer cannot take a deduction, the recipient of the alimony is no longer required to report the payments as taxable income. This change makes the transaction tax-neutral at the federal level, meaning there are no direct tax consequences for either party. This shift significantly impacts financial planning in divorces, as the loss of the deduction increases the net cost for the payer.

Defining Alimony for Tax Purposes

For individuals with agreements dated before January 1, 2019, the Internal Revenue Service’s (IRS) specific definition of alimony is necessary for determining deductibility. The IRS has established a set of criteria that a payment must meet to be considered alimony for tax purposes. If even one of these tests is not met, the payment cannot be treated as deductible alimony.

A primary requirement is that all payments must be made in cash, which includes checks or money orders. The transfer of property or the provision of services does not qualify as alimony. These payments must be mandated by a formal divorce or separation instrument, such as a divorce decree, a separate maintenance order, or a written separation agreement.

The legal instrument cannot designate the payment as something other than alimony. Spouses can include a provision in their agreement that explicitly states the payments are “not alimony” for tax purposes, in which case they would not be deductible or taxable. Furthermore, the spouses cannot be living in the same household when the payments are made.

A test involves the termination of payments upon the death of the recipient spouse. The divorce or separation agreement must state that there is no liability for the payer to continue making any payments after the recipient’s death. If the obligation continues in any form, such as payments to the recipient’s estate, none of the payments made before or after death qualify as alimony. Finally, the payments cannot be classified as child support, and the couple cannot file a joint tax return for the year the alimony is paid.

Distinguishing Alimony from Other Divorce-Related Payments

During a divorce, it is important to distinguish alimony from other financial transfers, as their tax treatments are different. The two most common payments confused with alimony are child support and property settlements.

Child support is never tax-deductible for the person paying it, nor is it considered taxable income for the recipient, regardless of the date of the divorce agreement. The IRS has specific rules to prevent parties from disguising child support as alimony. If a payment amount is scheduled to be reduced based on a contingency related to a child, such as the child reaching a certain age, marrying, or leaving school, that portion of the payment is treated as child support from the beginning.

Property settlements, which involve the division of marital assets, are also treated differently from alimony. The transfer of property between spouses or former spouses as part of a divorce is not a taxable event. The spouse transferring the property does not get a deduction, and the spouse receiving the property does not report it as income.

State Tax Treatment of Alimony

While the TCJA established a new federal standard for the tax treatment of alimony, these rules do not automatically apply at the state level. States have their own tax codes and may or may not conform to the changes made in federal law. This concept is known as state tax conformity.

Some states automatically adopt changes to the federal tax code, while others must pass specific legislation to align their rules. As a result, in certain states, alimony paid under a post-2018 agreement might still be deductible for the payer and taxable to the recipient on their state income tax returns. This means a payer might not get a federal deduction but could receive a state tax deduction, and the recipient would have non-taxable federal income but taxable state income.

Individuals paying or receiving alimony under a post-2018 agreement must verify the specific rules in their state of residence.