Definition
Alimony is a financial support payment made by one spouse to another during or after a legal separation or divorce. The purpose of alimony is to provide support to the lower-earning or non-earning spouse to help them maintain a similar standard of living to what they were accustomed to during the marriage.
Alimony payments are generally taxable to the recipient and tax-deductible for the payer, provided certain criteria are met. Specifically, alimony payments must:
- Be made via cash or its equivalent.
- Be made under a divorce or separation instrument.
- Not be designated as non-taxable/non-deductible in the divorce or separation instrument.
- Be paid when the spouses live in separate households.
- End upon the recipient’s death.
Child support payments, on the other hand, are neither taxable nor deductible.
Examples
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Monthly Alimony Payment: John is required to pay his ex-wife Jane $1,000 per month in alimony following their divorce. Jane must report this income on her tax return, while John can deduct it from his taxable income.
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Lump-Sum Alimony Payment: In lieu of monthly payments, a one-time lump-sum alimony payment. If John agrees to pay Jane a one-time alimony sum of $50,000, Jane would still be required to report this as income, and John could deduct this from his taxes.
Frequently Asked Questions (FAQ)
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Is alimony always required in a divorce?
No, alimony is not required in every divorce. It depends on the court’s evaluation of factors such as the duration of the marriage, the financial condition of both spouses, and contributions made by each spouse during the marriage.
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Can alimony payments be changed post-divorce?
Yes, alimony payments can be modified if either party experiences a significant change in circumstances, such as a change in income or financial need.
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Are alimony payments still tax-deductible after the 2017 tax law changes?
For divorce agreements executed after December 31, 2018, under the Tax Cuts and Jobs Act (TCJA), alimony payments are not tax-deductible for the payer and are not taxable to the recipient.
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What happens if the alimony recipient dies?
Alimony payments typically end upon the death of the recipient, unless otherwise specified in a divorce agreement.
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Child Support: Financial support provided by a non-custodial parent to a custodial parent for expenses related to raising their child. Unlike alimony, child support payments are neither tax-deductible by the payer nor taxable to the recipient.
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Adjusted Gross Income (AGI): A measure of income calculated from gross income and used to determine how much income is taxable. Alimony payments made under agreements executed before 2019 may be deducted to find the payer’s AGI.
Online Resources
Suggested Books for Further Studies
- Divorce & Money: How to Make the Best Financial Decisions During Divorce by Violet Woodhouse, CFP, and Dale Fetherling
- The Complete Guide to Protecting Your Financial Security When Getting a Divorce by Alan Feigenbaum and Heather Linton
- Nolo’s Essential Guide to Divorce by Emily Doskow
Fundamentals of Alimony: Business Law Basics Quiz
### Does alimony always need to be a monthly payment?
- [ ] Yes, alimony must always be paid monthly.
- [x] No, alimony can be a lump-sum or periodic payments.
- [ ] Alimony must be paid weekly.
- [ ] Alimony is only a one-time payment.
> **Explanation:** Alimony can be agreed upon as either monthly, lump-sum, or periodic payments, depending on the arrangement specified in the divorce agreement.
### Are child support payments and alimony treated the same for tax purposes?
- [ ] Yes, both are taxable to the recipient.
- [ ] Yes, both are deductibles for the payer.
- [x] No, only alimony may be taxable and deductible.
- [ ] Both are neither taxable nor deductible.
> **Explanation:** While alimony is generally taxable to the recipient and deductible by the payer, child support payments are neither taxable nor deductible.
### What conditions must alimony payments meet to be considered tax-deductible under agreements before 2019?
- [x] Payments must be made in cash or its equivalent and end upon the recipient’s death.
- [ ] Payments must be shared between spouses living together.
- [ ] Payments include voluntary support.
- [ ] Payments must not be court-ordered.
> **Explanation:** For alimony to be tax-deductible under agreements pre-2019, payments must be in cash, made under a legal document, not when spouses cohabitate, and cease upon the recipient’s death.
### How did the 2017 Tax Cuts and Jobs Act change alimony taxation?
- [x] Alimony is no longer deductible for the payer for most agreements post-2018.
- [ ] Alimony became deductible for all agreements.
- [ ] Alimony payments were doubled.
- [ ] The law mandates alimony for all divorces.
> **Explanation:** Post-2018 agreements due to the Tax Cuts and Jobs Act no longer allow alimony payments to be tax-deductible for the payer or taxable for the recipient.
### When can alimony payments be modified?
- [x] When there is a significant change in circumstances.
- [ ] When the marriage threshold is surpassed.
- [ ] When requested after 30 days.
- [ ] Never after the divorce.
> **Explanation:** Alimony payments can be requested for modification if significant changes in the financial situation of either party occur.
### If a divorce agreement specifies, can alimony continue after the recipient's death?
- [x] Yes, if specified legally in the agreement.
- [ ] No, alimony always automatically ends upon death.
- [ ] It converts to child support.
- [ ] Payments go to the state.
> **Explanation:** While generally, alimony ends at the recipient’s death, a legal agreement can specify continued payments under certain conditions.
### Can income changes affect alimony amounts?
- [x] Yes, significant income change can prompt a reevaluation of alimony.
- [ ] No, income change is irrelevant.
- [ ] Alimony only depends on prior assets.
- [ ] Changes are preplanned in unmodifiable increments.
> **Explanation:** Significant changes in income can affect alimony, leading to a court reevaluation of payment amounts.
### Is cohabitation with a new partner ground for modifying alimony?
- [x] Often, yes, as this may change the financial need.
- [ ] No, cohabitation doesn't change alimony.
- [ ] It converts alimony to child support.
- [ ] Cohabitation always ends the alimony obligation.
> **Explanation:** Cohabitation may affect the recipient’s financial need, potentially prompting modification of the alimony payments.
### Can alimony be considered a part of the adjusted gross income for tax purposes in all cases?
- [ ] Always, for any divorce agreement.
- [x] Only for agreements executed before January 1, 2019.
- [ ] Only for those executed post-2020.
- [ ] Never, it's excluded from AGI.
> **Explanation:** Alimony can be considered part of AGI for tax purposes only for agreements made before January 1, 2019, as per tax laws.
### Which legal documentation typically details alimony terms?
- [ ] Casual written agreement.
- [ ] Verbal agreement between spouses.
- [x] Divorce or separation instrument.
- [ ] State property guidelines.
> **Explanation:** Alimony terms must be documented in a legal divorce or separation instrument to meet enforcement and tax requirements.
Thank you for studying the fundamentals of alimony through our comprehensive exploration and engaging basics quiz. Continue to enhance your grasp of family and business law!
