Is Alimony Considered Taxable Income?

The tax treatment of alimony, a payment from one spouse to another under a divorce or separation agreement, depends on the date of that agreement. Significant federal tax law changes have altered how these payments affect income taxes for both the payer and the recipient. The taxability of alimony depends entirely on the date of the divorce or separation instrument.

Tax Treatment Based on Agreement Date

The tax treatment of alimony hinges on one date: December 31, 2018. The Tax Cuts and Jobs Act (TCJA) of 2017 altered the rules for any divorce or separation agreement executed after this date. For these recent agreements, alimony payments are no longer deductible by the payer. Consequently, the payments are not considered taxable income for the recipient, meaning the money is treated as a simple transfer for federal tax purposes.

Agreements executed on or before December 31, 2018, are grandfathered under the previous tax laws. Under these older rules, the payer can deduct the amount of alimony paid as an adjustment to their income, which reduces their overall taxable income. The recipient of these payments must then report the alimony as taxable income, subject to their regular income tax rate.

An exception exists for older agreements that are updated. If a divorce or separation instrument from before 2019 is legally modified after December 31, 2018, the tax treatment can change. If the modification document explicitly states that the new TCJA rules should apply, the payments will become non-deductible for the payer and non-taxable for the recipient. Without this specific language, the original tax treatment remains in effect.

IRS Definition of Alimony

For a payment to be considered alimony for tax purposes under a pre-2019 agreement, it must meet a series of tests defined by the IRS. It is not enough for the divorce decree to simply label a payment as “alimony.” If a payment fails to meet even one of these requirements, it does not qualify for federal tax purposes, and the associated tax rules do not apply.

• Payments must be made in cash, which includes checks or money orders. The transfer of property or the provision of services does not qualify.
• Payments must be mandated by a formal divorce or separation instrument. Voluntary payments made outside of such an instrument are not considered alimony.
• The instrument cannot designate the payment as something other than alimony, such as child support or a property settlement.
• The spouses cannot file a joint tax return.
• The spouses also must not be members of the same household at the time the payments are made if they are legally separated under a decree of divorce or separate maintenance.
• There can be no liability for the payer to continue making payments after the death of the recipient spouse. This last test ensures the payments are for support and not part of a property settlement disguised as alimony.

Reporting Alimony Payments on Your Tax Return

For individuals with divorce agreements finalized before January 1, 2019, proper reporting on federal tax returns is necessary. The payer and recipient use Schedule 1 of Form 1040, “Additional Income and Adjustments to Income,” to account for these payments. The process is distinct for each party.

The paying spouse reports their total payments on the “Alimony paid” line of Schedule 1 to claim a deduction. The payer must also enter the recipient’s Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). Failure to provide the correct number can result in the disallowance of the deduction and potential penalties.

The spouse who receives the alimony must report it as income on the “Alimony received” line of Schedule 1. The recipient must also provide their SSN to the payer. If they fail to do so, they may face a $50 penalty.

State Tax Implications

The federal tax rules from the TCJA are not universally applied at the state level. Individual states have their own tax codes and are not required to conform to these federal changes. This can create a situation where alimony payments are treated one way for federal taxes and another for state taxes.

Some states have not adopted the new federal standard for post-2018 agreements. In these states, alimony may still be deductible for the payer and taxable for the recipient on their state income tax returns. This discrepancy requires taxpayers to navigate two different sets of rules for federal and state purposes.

Because of this potential for divergence, individuals paying or receiving alimony should review the specific tax laws of their state of residence. Understanding the state’s position on alimony is necessary for accurate state tax filing and financial planning. Relying on federal rules alone could lead to incorrect state tax payments.