Alimony, spousal support, or spousal maintenance is the money that one spouse pays to the other after their divorce or separation. Its purpose is to enable their former partner with a lower income to maintain a decent standard of living.
Until recently, the paying spouse would deduct spousal support payments, and the recipient needed to report it as income for tax purposes. However, the guidelines have changed. Whether or not your alimony will be tax-deductible in 2023 depends on several factors.
The Date of the Divorce
The Tax Cuts and Jobs Act (TCJA) came into effect in December 2017, resulting in significant changes in alimony taxes. You can report your alimony payments as a tax deduction only if you finalized your divorce by December 31, 2018. Similarly, the recipient must report the amount as income and pay taxes on it.
If you concluded your divorce process on January 1, 2023, you can’t claim a tax deduction for alimony payments. Additionally, the IRS doesn’t take spousal support as income for the recipient. Therefore, the receiving spouse doesn’t pay tax on it. The same applies to all alimony agreements modified after December 31, 2018.
When Alimony Is Deductible
Alimony payments for orders effected before 2019 typically involve transferring spousal support from the higher-earning partner to the lower-earning one. This potentially brings tax savings to both parties.
First, it shifts the paying spouse’s income to a lower tax bracket, reducing the money that goes to the IRS. On the other hand, the recipient’s tax bracket remains unaffected. To qualify for a tax deduction on alimony, you must adhere to certain rules.
Pay Alimony According to the Divorce Document
You must make alimony payments according to the rules stipulated in your divorce papers. The document could be a separation agreement, marital settlement agreement, divorce judgment, court order, or temporary support order.
Ensure your documents indicate the amount you should pay and a clear description of the payment – alimony, spousal maintenance, and spousal support. The papers must also describe the amount as deductible by the paying spouse.
Pay Alimony in Cash or by Check
The higher-earning spouse must pay alimony in cash or check to take a tax deduction on the payment. Spousal support isn’t deductible if you provide it in kind, like giving your spouse some goods or services.
Be Physically Separated
If you have finalized your divorce but still live with your former spouse, any alimony payments you make aren’t tax-deductible at any time. You can only claim a deduction on alimony paid prior to January 1, 2019, when you are living in different residences.
Pay Alimony Independent of Other Payments
Tying alimony to other responsibilities pertinent to your divorce or separation can declassify your alimony payments as tax-deductible at any time, especially in 2023. For instance, child support payments aren’t deductible. If you tie alimony to child support before or after the TCJA went into effect, you can’t claim a tax deduction on those payments. Similarly, if you combine alimony with the amount you pay in marital property distribution, the full payment becomes non-deductible.
Overall, it is best not to tie alimony to any other payments that are incurred as the result of the divorce.
Avoid Alimony Front Loading
In this context, front-loading means making advance payments for alimony that’s due later. Be sure to understand IRS guidelines against front-loading.
You shouldn’t pay excessively high amounts in alimony in the first three years of your divorce. The IRS can still tax the excess following the third year of separation.
Joint Tax Return Restriction
You cannot deduct alimony payments if you pay a joint tax return with the recipient, at any time.
Specify the Conditions for Alimony Termination
Your divorce judgment or marital settlement agreement should specify that alimony payments end when the recipient dies. It can also state that the obligation terminates with the paying spouse’s death. You may also have the right to stop paying alimony if the recipient gets married.
Claiming a Tax Deduction on Alimony
If your alimony is deductible, you can deduct the payments even without itemizing the deductions on your tax return. Use the IRS Form 1040 to claim your deduction, not Form 1040A or Form 1040EZ. You must provide the alimony recipient’s social security number. It is crucial to note that this only applies to divorces filed on or before December 31, 2018.
When Alimony Is Non-Deductible
TCJA has had significant impacts on the incomes of people who signed divorce agreements from 2019 onwards. This is how the tax changes affect individuals paying or receiving alimony today.
The new law seems to benefit people receiving spousal support in most cases. The IRS no longer requires receiving recipients to declare alimony payments as income. Therefore, no taxes are paid on it.
Not reporting alimony as income makes the recipient’s taxable income lower. It might affect the social programs for which they qualify. For instance, a reduced income potentially qualifies you for better subsidies in health care programs.
Individual Retirement Accounts (IRAs)
An individual who withdraws money from their IRA to make alimony payments has a tax advantage. The IRS doesn’t tax such funds upon withdrawal, according to the new tax code.
However, the law restricts how people receiving alimony can save for retirement. Alimony payments cannot be invested into an IRA. People who rely on alimony payments entirely might have challenges saving for retirement.
Other Tax Changes in the Divorce Process
The TCJA altered many aspects of divorce besides alimony. If you are considering dissolving your marriage, here are more ways the new law might affect the process:
Before signing TCJA into law, parties in a divorce could take dependency exemptions for their children. These serve as a tax deduction by decreasing an individual’s taxable income. Dependency exemptions no longer exist.
According to the TCJA, couples cannot deduct divorce-related expenses like legal fees as they could do a few years ago. The law regards such costs as personal expenses.
Child Tax Credits
The good news is that you can claim a tax credit of $2,000 for each child under 17 that you support. If you are still paying support for a child above 17, you could qualify for a child tax credit of up to $500.
Further information on how the TCJA affects the divorce process can be found here.
Work with Nevada Divorce Law Experts
Divorce or separation can change your life dramatically. Besides losing your spouse and new arrangements with your children, you may have to start paying alimony.
Divorce laws can be convoluted. If you are undergoing a marriage dissolution in Nevada, Willick Law Group can protect your interests.
Contact us to discuss how we can help.