What Are the Section 71 Rules for Taxing Alimony?
The tax rules for alimony hinge on the date of your divorce agreement. Understand how this timing determines the tax obligations for both payers and recipients.
Alimony payments are subject to federal tax rules that determine if they are deductible by the payer and considered income for the recipient. The governing rules changed significantly due to the Tax Cuts and Jobs Act of 2017 (TCJA), creating different standards based on the finalization date of a divorce or separation instrument. Understanding which set of rules applies is the first step in handling the tax implications of alimony.
Tax Treatment Based on Divorce Date
The date of a divorce or separation instrument is the determining factor for the tax treatment of alimony payments. The TCJA created a dividing line, separating agreements executed on or before December 31, 2018, from those executed after that date.
For any divorce or separation instrument finalized on or before December 31, 2018, the previous tax rules apply. Under these rules, the spouse making the payments can deduct the full amount of alimony paid. The spouse receiving the payments must then include that same amount as taxable income, which shifts the tax burden from the payer to the recipient.
A different set of rules applies to agreements executed after December 31, 2018. For these agreements, the TCJA eliminated the tax deduction for alimony. The payer may not deduct the amounts paid, and the recipient does not include the payments in their gross income. This makes the tax treatment neutral, similar to non-taxable transfers like child support.
Qualifying Payments for Pre-2019 Agreements
For alimony payments under a pre-2019 agreement to be deductible by the payer and taxable to the recipient, they must meet several specific tests.
- Payments must be made in cash, which includes checks and money orders. Transfers of property or the use of the payer’s property do not qualify.
- The payments must be received under a divorce or separation instrument. The parties can designate a payment as “not alimony” within the instrument, which prevents it from being treated as such for tax purposes.
- If legally separated under a final decree, the former spouses cannot be members of the same household when a payment is made.
- The obligation to make payments must end upon the death of the recipient spouse. If the instrument requires payments to continue to the recipient’s estate, none of the payments qualify as alimony.
- A payment cannot be treated as child support. If a payment amount is scheduled to be reduced based on an event related to a child, such as turning 18, that portion is considered child support.
- Payments are subject to the alimony recapture rule. This rule prevents property settlements from being disguised as deductible alimony and applies if payments decrease significantly during the first three years. If triggered, the payer must include the previously deducted amount as income in the third year, and the recipient may deduct it.
Modifying Pre-2019 Divorce Agreements
If a divorce or separation agreement executed on or before December 31, 2018, is legally modified, the original tax treatment generally continues to apply. The modification itself does not automatically switch the tax rules to the post-TCJA system.
The parties involved can choose to adopt the new tax rules. For this to take effect, the modification must expressly state that the TCJA rules should apply. This language would make the alimony payments no longer deductible by the payer or includible in the recipient’s income.
Without this explicit statement, the old rules remain in force for all payments under the modified agreement. Parties should consider their financial situations before making this change, as applying the new rules is typically irrevocable.
Reporting Alimony on Your Tax Return
For alimony under pre-2019 agreements, both parties have reporting duties on their federal income tax returns. The payer reports the total alimony paid for the year on Schedule 1 of Form 1040 to claim the deduction. On the return, the payer must include the recipient’s Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).
Failure to provide the correct SSN or ITIN can result in the disallowance of the deduction and may lead to penalties. The recipient of the alimony must report the payments as taxable income, also on Schedule 1 of Form 1040. The recipient is also required to provide the payer’s SSN or ITIN on their return.