Definition of Alimony Payment
Alimony payments, often referred to as spousal support, are financial support obligations ordered by a court or agreed upon by the parties during a divorce or legal separation. These payments are designed to provide economic support to a lower-earning or non-earning spouse until the recipient can become financially independent.
In the USA, the tax treatment of alimony payments changed with the implementation of the Tax Cuts and Jobs Act (TCJA). For divorce or separation agreements executed after December 31, 2018, alimony payments are no longer deductible by the payer, nor are they taxable income for the recipient. However, for agreements executed before this date, the payments are deductible from the payer’s adjusted gross income and must be reported as income by the recipient.
Examples of Alimony Payments
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Monthly Payments: A husband is ordered to pay his ex-wife $2,000 per month as alimony. For agreements executed before January 1, 2019, he can deduct these payments from his taxable income, and she must report them as taxable income.
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Lump-Sum Payments: A spouse agrees to pay a one-time amount of $50,000 as alimony. For agreements before 2019, the payer can deduct the lump-sum amount, and the recipient has to include it in their taxable income for that year.
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Temporary Support: During the divorce proceedings, one spouse may be ordered to pay temporary alimony. The tax treatment of these payments depends on when the agreement was executed.
Frequently Asked Questions
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Q: Are alimony payments still tax-deductible under the new tax laws?
- A: Alimony payments are not tax-deductible for the payer nor taxable to the recipient for divorce agreements executed after December 31, 2018.
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Q: How are alimony payments treated if the agreement was made before January 1, 2019?
- A: For such agreements, alimony payments are deductible by the payer and taxable to the recipient.
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Q: What differentiates alimony payments from child support?
- A: Alimony is meant for the support of a former spouse, while child support is exclusively for the financial support of a child or children.
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Q: Can alimony payments be modified?
- A: Yes, alimony payments can be modified based on changes in circumstances such as income changes, remarriage, or retirement.
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Q: Is there a tax penalty for not reporting alimony income?
- A: If an individual fails to report alimony received, they may be subject to penalties and interest on the unpaid tax.
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Child Support: Payments made for the financial support of children after a divorce or separation, which are not deductible by the payer nor taxable to the recipient.
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Spousal Support: Another term for alimony, meant to provide financial support to a lower-earning spouse after a divorce.
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Tax Cuts and Jobs Act (TCJA): A law that enacted major changes to the tax code, including the treatment of alimony payments.
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Adjusted Gross Income (AGI): An individual’s total gross income minus specific adjustments, which is used to calculate taxable income.
Online Resources
Suggested Books for Further Studies
- Divorce & Money: How to Make the Best Financial Decisions During Divorce by Violet Woodhouse
- The Complete Guide to Protecting Your Financial Security When Getting a Divorce by Alan Feigenbaum and Heather Linton
- The New Rules of Divorce: Twelve Secrets to Protecting Your Wealth, Health, and Happiness by Jacqueline Newman
Accounting Basics: “Alimony Payment” Fundamentals Quiz
### How are alimony payments treated for tax purposes for agreements executed after December 31, 2018?
- [x] They are not deductible by the payer nor taxable to the recipient.
- [ ] They are deductible by the payer and taxable to the recipient.
- [ ] They are taxable to the recipient, but not deductible by the payer.
- [ ] They must be reported as income by both parties.
> **Explanation:** Under the Tax Cuts and Jobs Act, for agreements executed after December 31, 2018, alimony payments are not deductible by the payer nor taxable to the recipient.
### How should alimony payments be reported for tax purposes under pre-2019 agreements?
- [ ] As non-taxable income by the recipient.
- [x] As a tax deduction by the payer and taxable income by the recipient.
- [ ] They should not be reported for tax purposes.
- [ ] Only need to be reported if exceeding a certain threshold.
> **Explanation:** For agreements executed before January 1, 2019, the payer may deduct alimony payments from their income, and the recipient must include them as taxable income.
### If a divorce agreement falls under the pre-2019 rules, who can benefit from a tax deduction?
- [ ] The recipient of alimony payments
- [ ] Neither the payer nor the recipient
- [ ] Both parties
- [x] The payer of alimony payments
> **Explanation:** Under pre-2019 rules, the payer benefits from a tax deduction on alimony payments.
### What term is used interchangeably with 'alimony'?
- [ ] Child Support
- [x] Spousal Support
- [ ] Family Support
- [ ] Maintenance Income
> **Explanation:** Alimony is also known as spousal support.
### Can alimony payments be adjusted after the initial divorce decree?
- [x] Yes, they can be modified under certain circumstances.
- [ ] No, they are fixed once decided.
- [ ] Only if both parties move to a different state.
- [ ] Yes, but only upward adjustments are allowed.
> **Explanation:** Alimony payments can often be adjusted based on significant changes in circumstances.
### What differentiates alimony payments from child support payments?
- [ ] Alimony payments are higher than child support payments.
- [ ] Only alimony payments are tax-deductible.
- [ ] They are both similar with no key differences.
- [x] Alimony supports a former spouse, while child support is strictly for the children.
> **Explanation:** Alimony is support for a former spouse, whereas child support strictly benefits the children.
### How are lump-sum alimony payments treated in pre-2019 agreements?
- [ ] They are not treated differently from monthly payments.
- [ ] They are only partially deductible.
- [ ] They are dy-taxable for the recipient.
- [x] They are deductible for the payer and fully taxable for the recipient in the year received.
> **Explanation:** Lump-sum payments, like monthly payments under pre-2019 rules, are deductible for the payer and fully taxable for the recipient.
### What law changed the tax treatment of alimony?
- [ ] The Alimony Reform Act
- [ ] The Family Support Act
- [ ] The Divorce Reform Act
- [x] The Tax Cuts and Jobs Act
> **Explanation:** The Tax Cuts and Jobs Act of 2017 changed the tax treatment of alimony payments.
### If a person fails to report alimony income, what could be a possible consequence?
- [x] Tax penalties and interest on unpaid tax.
- [ ] Increased alimony payments.
- [ ] Garnishment of wages.
- [ ] No significant consequences.
> **Explanation:** Failure to report alimony as income can result in tax penalties and interest.
### What critical factor determines the current tax treatment of alimony payments?
- [ ] The income level of the payer.
- [x] The date the divorce or separation agreement was executed.
- [ ] The length of the marriage.
- [ ] Whether the couple has children.
> **Explanation:** The date of the divorce or separation agreement is the key determinant; those executed before January 1, 2019, follow old rules, and those after follow new rules.
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