It’s my annual “Taxes from A to Z” series! This time, it’s Tax Cuts and Jobs Act (TCJA) style. If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss under the new law, you won’t want to miss a single letter.
A is for Alimony.
For the past 70 years, alimony payments have been deductible by the payer and taxable as income to the recipient (it’s worth noting that there were some significant changes to the rules in 1984). Alimony was previously deducted on the front page of the form 1040 as an “above the line” deduction at line 31a (black arrow), meaning that it was available as a deduction even for those taxpayers who didn’t itemize. And it was taxable to the recipient, reportable on line 11 (orange arrow).
That all changed under the TCJA. Now, alimony will not be deductible under new agreements signed on or after January 1, 2019. That also means that it will not be taxable to the recipient. However, if you have an older agreement, the tax treatment stays as-is unless you modify the agreement after January 1, 2019, by explicitly referencing the new law.
Taxpayers will also have to look a little harder to find where to report alimony payments beginning with the 2018 tax year (the return you’re filing now in 2019). Remember those new schedules which were created to make up for the not-quite-postcard-sized return (more on that here)? Alimony has been moved to Schedule 1, Additional Income and Adjustments to Income(downloads as a PDF). Alimony payments are still deducted on line 31a (red circle) while corresponding alimony income is still reported on line 11 (green circle), just on a new schedule:
To qualify as alimony for purposes of a federal income tax deduction, you must be divorced or under a separation order. You cannot be living under the same roof as your spouse/ex-spouse when you make the payments (unless you meet a court-ordered exception), nor can you claim alimony in a year that you file a joint tax return with your spouse/soon to be ex-spouse.
Alimony payments must be “to or for a spouse or former spouse under a divorce or separation instrument.” That includes an official decree of divorce with mandatory support payments, a written separation agreement requiring such payments or any other type of court order requiring you to support your spouse. The agreement or order does not have to be permanent: temporary decrees, interlocutory (not final) decrees, decrees of alimony pendente lite (awaiting a final decree “during the proceedings”) count.
Alimony payments must be in cash or cash equivalent, like a check or money order.
The obligation to pay alimony must not be voluntary. The IRS and you may have a different understanding as to what constitutes “voluntary.” Here’s a tip: if you have an official order or agreement, it’s not voluntary. But if you have an understanding, you feel morally compelled to make payments because you screwed things up or your ex-spouse is demanding that you pay something and just want to shut him or her up, that is voluntary and doesn’t count as alimony.
The payments must not be child support. Child support is tax neutral: it’s neither tax-deductible to the payer nor taxed as income to the recipient. The characterization of payments isn’t always up to you: if you are behind on child support, the IRS will characterize payments made to your spouse/ex-spouse as child support and not as alimony, no matter what your agreement says. If you’re the payer, that means you lose the deduction.
Payments that are considered property settlements are not considered alimony. Ditto for payments or services to keep up your property, like mortgage payments for a house or other property. For example, if your ex can live rent-free in a home that you are responsible for maintaining (including payments for mortgage, real estate taxes, insurance, and repairs), those payments aren’t alimony. And the value of the rent that your ex isn’t paying to live there? Also not alimony. What about an IOU to settle a property settlement obligation? Not alimony. Again, property settlements aren’t considered alimony, whether in a lump-sum or installments. Promises to pay, promissory notes or regular payment schedules don’t change that.
Payments that are your spouse’s part of community property income are also not considered alimony. That could come into play if you live in a community property state like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. State law determines whether your income is separate or community income in those states.
Death changes everything. To qualify as alimony, you must have no obligation to make any payment (in cash or property) after the death of your spouse or former spouse.
It’s only alimony if the divorce or separation instrument doesn’t say it’s not alimony. I know, it’s a double negative. But if your settlement or other agreement negotiated as part of the divorce was executed on the condition that it would not be treated as alimony, then you can’t treat it as alimony even if you think it should be.