The Tax Implications of Alimony Payments

Divorce changes a lot of things—including your tax situation. One aspect of your divorce that can have a significant impact on your taxes is whether you make or receive alimony payments. We are often asked, “Is alimony tax deductible?” The answer, as with so many things in divorce, is: “It depends.” Read on to learn more about alimony payments and income tax.

Are Alimony Payments Taxable?

Alimony, also called spousal support, used to be deductible to the paying spouse and taxable to the recipient spouse. For example, if the economically dominant spouse had income of $150,000 per year, and the other spouse had income of only $20,000, the court might award alimony in a divorce. Let’s assume the court awarded, or the parties agreed, that the spouse with the higher income would pay alimony of $40,000 annually. Under the old law, the payor spouse would then have income of $110,000 per year, and the recipient spouse would have income of $60,000.

There were some benefits to this way of doing things. The payor spouse reduced their income and potentially put themselves in a lower tax bracket. The attractiveness of these tax benefits made some people more willing to pay alimony than they might have been otherwise. While the recipient spouse with the lower income would have to pay taxes on alimony payments, they would likely do so in a lower tax bracket than the payor spouse. As a result, fewer dollars would go to the government as taxes, and more would remain within the family.

However, the Tax Cuts and Jobs Act of 2017 (TCJA) radically altered the rules pertaining to taxes and alimony. Now, for a divorce or separation agreement that was executed after December 31, 2018, or a court order entered after that date, alimony is no longer deductible from income to the payor spouse, and no longer taxable as income to the recipient. In the scenario described above, the payor spouse’s taxable income would still be $150,000, and the recipient spouse’s taxable income would still be $20,000.

Separations and Divorces That Took Place Before 2019

For divorces or separation instruments finalized before 2019, the old rules would still apply, making alimony payments tax-deductible to the payor spouse and taxable to the recipient spouse, so long as certain conditions were met:

• The spouses, if still married, could not file a joint income tax return
• The alimony payment was made in cash (including money orders or checks)
• The alimony payment was made to a spouse or former spouse, under the terms of a separation or divorce instrument, including an agreement or court order
• For spouses who were legally separated, the spouses could not be members of the same household when the payment was made (Note: Maryland no longer offers limited divorce, which was the equivalent of legal separation)
• There could be no liability for continued payments in the event of the death of the recipient spouse
• The payment was expressly intended as alimony or spousal support, and not as a property settlement or child support.

If all of the above conditions are met for divorce or separation instrument that predates 2019, the alimony payments are “grandfathered in” to the old law, meaning that they remain deductible to the supporting spouse.

However, if either party files a motion to modify spousal support, they could find themselves subject to the new rules imposed by the TCJA.

Tax Rules for Modification of Alimony

Unless couples specifically agree to make an award of alimony non-modifiable, alimony can be modified in the future if circumstances warrant. Alimony awarded by a court (as opposed to agreed to by the divorcing couple) is always modifiable. So what happens if a couple divorced in 2018, and then, in 2024, one ex-spouse decides to seek a modification of alimony? This might happen if, for example, one of the parties experienced a material change in financial circumstances.

The modification request could come before the court either by one party filing a motion to modify alimony, or as a result of an agreement between the parties to modify alimony. If the court decides to grant the modification, the alimony payment could retain its pre-TCJA character or could no longer be tax-deductible to the payor spouse if the modification order expressly states that the repeal of the deduction for alimony payments applies to the modification.

The tax implications of alimony payments and changes in the law highlight why it is so important to be sure that you understand every provision of an agreement you sign, including an agreement to modify alimony. If you are seeking to pay less alimony, you may get your wish—only to find that you suddenly have much more taxable income to report, and may be in a higher tax bracket.

Work with an Experienced Alimony Attorney

Whether you are the payor or the recipient, alimony payments can have a significant impact on your financial well-being after divorce. It is essential to make sure you know all the tax implications of an agreement regarding spousal support. To ensure that you have the information you need to make good decisions for your future, consult with an experienced divorce and alimony attorney. Contact Strickler, Platnick & Hatfield to schedule a consultation.