What Are the Current IRS Alimony Rules?
The date of your divorce or separation agreement determines the tax rules for alimony, affecting the payer's deduction and the recipient's taxable income.
Alimony consists of payments made to a spouse or former spouse under a separation or divorce agreement. Due to the Tax Cuts and Jobs Act of 2017 (TCJA), the tax treatment of these payments depends entirely on the date the agreement was executed. This creates two sets of rules: one for agreements finalized on or before December 31, 2018, and another for those finalized after that date.
Defining Alimony for Tax Purposes
For the IRS to classify a payment as alimony, it must meet several specific criteria. These rules are designed to distinguish alimony from other financial transfers during a divorce, such as child support or property settlements. To qualify as alimony, a payment must meet all of the following conditions:
- The payment must be made in cash, which includes checks and money orders.
- It must be required by a divorce or separation instrument, like a divorce decree or written agreement.
- The legal instrument must not designate the payment as something other than alimony.
- The spouses cannot be members of the same household when the payment is made.
- There is no obligation for payments to continue after the death of the recipient spouse.
Tax Treatment for Pre-2019 Agreements
For divorce or separation agreements executed on or before December 31, 2018, the paying spouse can deduct the full amount of the payments from their income. This is an “above the line” deduction, meaning the payer does not need to itemize to claim it. The recipient spouse must include the payments as taxable income.
These older agreements are subject to the alimony recapture rule, which is designed to prevent a property settlement from being disguised as deductible alimony. The rule can be triggered if alimony payments decrease substantially or cease within the first three calendar years. The IRS specifically examines payments made in the first and second post-separation years to see if they were reduced by more than $15,000 in the third year.
If the rule is triggered, the calculation is done in the third year. The paying spouse must include the recaptured amount as income, reversing a portion of the prior deduction. The recipient spouse can then deduct the recaptured amount from their income.
Tax Treatment for Post-2018 Agreements
For any divorce or separation agreement executed after December 31, 2018, the tax treatment has changed. Under the new rules, the spouse making alimony payments cannot deduct them. The spouse receiving the payments does not include them in their gross income, making the payments tax-free.
This change shifts the tax burden from the recipient to the payer, as payments are now made with after-tax dollars. The value of alimony in divorce negotiations is different under this system because the tax deduction is no longer a financial benefit for the paying spouse.
A key part of the new law addresses modifications to older agreements. If a pre-2019 agreement is legally modified after December 31, 2018, the old tax rules will continue to apply by default. The new, tax-neutral treatment will only be used if the modification document explicitly states that the TCJA rules should apply to the modified agreement.
How to Report Alimony Payments
For agreements executed after 2018, reporting is straightforward: no action is necessary for either party. The payments are not reported on federal income tax returns because they are not deductible or taxable.
For those operating under a pre-2019 agreement, the payer must report the total amount paid on Schedule 1 of Form 1040. On this form, the payer must also provide the recipient’s Social Security Number (SSN) or Individual Taxpayer Identification Number (TIN). Failure to provide the correct TIN can result in a $50 penalty and may lead to the disallowance of the deduction.
The recipient of taxable alimony under a pre-2019 agreement also uses Schedule 1 to report the payments as income. The recipient is required to provide their TIN to the paying spouse, and failure to do so can result in a $50 penalty. Both parties must enter the date of the original divorce or separation agreement on Schedule 1.