Is Alimony Taxable?
Read on to learn how to determine whether alimony is taxable in your situation.
Alimony and Taxes
For years — decades — alimony payments were tax-deductible to the person paying alimony, and taxable income to the person receiving alimony. Under the 2017 tax law, now alimony payments are no longer tax-deductible for the payer, and they aren’t considered taxable income for the recipient.
To understand the impact of whether alimony is taxable on your family’s bottom line, check out our articles explaining that, including the basics of marginal tax brackets.
Read: Tax Basics for Divorce
Was Alimony Taxable Under the Old Law?
Under the old law, alimony was tax-deductible to the person paying alimony, and taxable income to the person receiving alimony.
Generally speaking, a person paying alimony has a higher income — and therefore is in a higher marginal tax bracket — than a person receiving alimony.
At first blush, the old way seems good for the alimony payor (who gets a tax deduction) and bad for the alimony recipient (who pays tax). But it’s more complicated than that.
But in many divorces — be they mediated, collaborative, or even litigated — the divorce agreement would “share” the benefit of the lower alimony tax bill so that both spouses receive financial upside of the lower tax bill.
Is Alimony Taxable Under the New Law?
Under the 2017 tax law, alimony payments are no longer tax-deductible for the payer, and they aren’t considered taxable income for the recipient.
Does that mean no one pays tax any on alimony? No.
Under the old way, the alimony payor got to deduct alimony paid. Under the new way, the payor pays income tax on his or her salary but doesn’t get a deduction for alimony payments. The recipient doesn’t pay any income on the alimony received.
In other words, the government used to receive tax on the alimony paid at the recipient’s lower tax bracket. Now, the tax is paid at the payor’s higher tax bracket.
Under the new system, the government gets paid more in taxes on alimony than it did under the old law.
Is Alimony Taxable Now?
The tax treatment of alimony didn’t just change for everyone across the board in 2017. For some people, alimony is still tax-deductible to the payor and taxable to the recipient. For others, it isn’t. It all depends on when your divorce happened.
Changes to the tax treatment of alimony under the 2017 tax law are effective on divorces or legal separations finalized after December 31, 2018.
So, if you were divorced prior to 2019, your alimony payments are probably still deductible to the payor and taxable to the alimony recipient.
But, if you were divorced after December 31, 2018, the payor probably does not have to deduct alimony payments made, and the recipient does not have to pay tax on alimony received. This is sometimes referred to as “tax neutral.”
Is Alimony Taxable if We Change Our Alimony Agreement After the Divorce?
What if you divorced in 2015, under the old rules. The payor deducts for alimony paid and the recipient pays income tax on alimony received. In 2021, you modified the amount of alimony paid. Does the payor still get a deduction and the recipient still pay income tax on alimony?
Generally speaking, in pre-December 31, 2018 divorces, alimony is deductible from the income of the payer spouse and includable in the income of the receiving spouse, even if the agreement was modified after December 31, 2018.
The only exception is if the modification both:
- changes the terms of the alimony or separate maintenance payments; and
- states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
In other words, if you both agree that you want the new tax treatment and specifically say so in the agreement you enter with the court, alimony will be treated the new way. Otherwise, the default is the old way.
Divorce has a tremendous impact on your finances for years to come. It’s important to understand how this works so that you can make informed decisions that move you toward the life you want to live.
Our first step at Freed Marcroft, the Goals & Planning Conference, is designed to get to the heart of your problem and unveil your true goals. Then, we take those goals along with the facts of your case and analyze them so that we can present you with recommendations and options on how to move forward.