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
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.
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.
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
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.
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.
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.
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.
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.
Related Terms
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.
Spousal Support: Another term for alimony, meant to provide financial support to a lower-earning spouse after a divorce.
Tax Cuts and Jobs Act (TCJA): A law that enacted major changes to the tax code, including the treatment of alimony payments.
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
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