When some people get divorced, they establish agreements where one ex-spouse provides financial support to the other during or after the divorce. These financial support payments, commonly known as alimony, are often essential for lower-earning spouses. But many divorcées have questions about whether they have to pay taxes on the alimony payments they make or receive.
Is Alimony Considered Income?
Alimony, which some call spousal support or maintenance, is a payment that one ex-spouse makes to the other after a divorce or separation. The purpose of alimony is to provide financial support to the lower-earning spouse. Alimony payments help the lower-earning spouse maintain a standard of living that is close to what they were accustomed to during the marriage.
For many years, the tax rules around alimony were straightforward. The person paying alimony could deduct the payments from their taxable income, and the person receiving alimony had to report it as taxable income. In essence, alimony payments were considered income for the recipient but not the payor. However, this changed with the Tax Cuts and Jobs Act (TCJA) of 2017.
What Is the Tax Cuts and Jobs Act in Texas?
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced sweeping changes to the U.S. tax code. Among its provisions, it significantly altered how taxpayers treat alimony payments.
Before the TCJA, individuals who paid alimony to their ex-spouses could deduct those payments from their taxable income. On the flip side, recipients reported these alimony payments as taxable income.
The TCJA changed this approach. Starting on January 1, 2019, the law eliminated the deduction for those making alimony payments. Consequently, they can no longer reduce their taxable income by the amount they pay in alimony. Similarly, recipients of alimony do not report these payments as income under the new rules, so they don’t pay taxes on the amounts they receive.
However, the TCJA did not retroactively apply to divorce or separation agreements signed before January 1, 2019. Therefore, for those earlier agreements, the old rules still stand: payers deduct the alimony they send to their exes, and recipients must report the alimony as taxable income.
Is Alimony Tax Deductible?
It depends on the date of the divorce agreement. For agreements executed on or after January 1, 2019, payors cannot deduct alimony payments from their taxable incomes. Similarly, recipients do not report these alimony payments as taxable income, and they do not pay taxes on the alimony they collect.
For divorce agreements signed before January 1, 2019, the rules are different. Payors can deduct from their taxes the alimony payments they make, reducing their taxable income. In contrast, recipients report these alimony payments as taxable income and owe taxes on the amounts they receive.
Different Types of Alimony in Texas
In Texas, there are two primary types of alimony: court-ordered spousal maintenance and contractual alimony. Here are the key differences:
- Court-Ordered Spousal Maintenance: Judges award this alimony based on specific criteria during divorce proceedings. The spouse seeking support must demonstrate a legitimate need, often tied to factors like family violence, long-term marriage, or disability. The judge uses legal guidelines to determine the duration and amount, with factors such as the marriage’s length and each spouse’s financial situation playing a role.
- Contractual Alimony: This type arises from an agreement between spouses, not a court order. The terms, eligibility, duration, and amount depend on the private agreement both parties negotiate, allowing for more flexibility when compared to court-ordered maintenance.
Alimony Tax Deduction Requirements
The Internal Revenue Service (IRS) has specific requirements that payments must meet to qualify as alimony or separate maintenance for tax purposes. They include the following:
- Spouses Do Not File Jointly: The spouses must not file a joint tax return with each other in the year the payer makes the payment.
- Cash Payments: The payments must be in cash, which includes checks or money orders.
- Divorce or Separation Instrument Requirement: Payments must go to a current or former spouse, and the parties must have a divorce agreement or other separation instrument in place.
- Spouses Do Not Live Together: If the parties are legally separated, the payer and the recipient spouse cannot be members of the same household when the payments are made.
- Payments Cease Upon Death: The agreement must not include any requirement for the payments to continue after the recipient spouse dies.
- No Duplication with Child Support: The payments must not be treated as part of a child support arrangement or a property settlement.
- No Tax Specifications: The divorce agreement must not specify that the alimony is part of the recipient’s gross income or a deductible portion of the payor spouse’s income.
How Is Alimony Taxed?
Tax rules for alimony depend on when a divorce or separation agreement took place. For agreements signed before January 1, 2019, the person paying alimony can deduct the payments from their taxes. The person receiving the alimony must report it as income and pay taxes on it.
But for agreements made on or after January 1, 2019, these rules changed. Now, the person paying alimony cannot deduct it, and the person getting the alimony does not treat it as taxable income. This means if you receive alimony from a recent agreement, you don’t pay taxes on that money.
What Happens If I Don’t Claim Alimony on My Taxes?
Failing to report alimony payments as income could lead to significant tax consequences. For divorce agreements executed before January 1, 2019, recipients must declare alimony as taxable income. For those executed on or after that date, payors must declare any alimony payments they make as part of their gross income. Overlooking these requirements invites IRS scrutiny and could result in back taxes, interest on unreported income, and other severe penalties.
Contact a Texas Alimony Lawyer Today
Whether you are entitled to receive alimony or obligated to pay it, it’s natural to have concerns about your finances during and after a divorce. If you still have questions about the taxability of your alimony payments or any other divorce-related matter, reach out to Smith Family Law right away.
Our knowledgeable Texas alimony lawyers can answer your questions and handle every aspect of your case while you focus on starting fresh. Contact us now at (512) 764-1044 to learn more in your free initial consultation.