Navigating the Complexities of Alimony and Taxes
When it comes to divorce, the financial implications can be overwhelming. One of the most critical aspects to consider is how alimony payments will affect your tax liability. The good news is that the 2017 Tax Cuts and Jobs Act (TCJA) has simplified the tax rules surrounding divorce, making it easier to understand how alimony payments are reported on your tax return.
Understanding the New Rules
If your divorce or legal separation was finalized on or after January 1, 2019, alimony or maintenance payments are no longer considered taxable income for the recipient spouse. This means that the receiving spouse does not need to report these payments on their tax return. On the other hand, if you’re the paying spouse, you cannot deduct these payments from your taxable income.
Pre-2019 Divorces: A Different Story
If your divorce was finalized before December 31, 2018, the tax treatment of alimony is more complicated. The receiving spouse must report alimony payments as income on their tax return, while the paying spouse can deduct these payments from their taxable income. However, this deduction is only available if the divorce decree predates 2019.
Defining Alimony
Alimony is financial support paid by one ex-spouse to another, usually the higher earner. To qualify as alimony for tax purposes, the payment must meet certain criteria, including:
- A joint tax return isn’t filed for the current tax year
- The payment is made in cash, check, or money order
- The payment is made to a spouse or former spouse under a divorce or separation instrument
- Spouses or ex-spouses aren’t sharing a household when the payments are made
- Payments aren’t required to be made after the death of the receiving spouse
- Payment isn’t part of a property settlement or child support payments
Child Support: A Different Ball Game
Child support is a form of spousal support designed to financially provide for adopted or biological children of the marriage. Unlike alimony, child support is not taxable as income, nor are the payments tax deductible. This tax approach has been consistent in family law for many years.
Reporting Alimony on Your Tax Return
If your divorce decree was finalized before January 1, 2019, you’ll need to report alimony payments on your federal tax return using Form 1040, Schedule 1. The paying spouse can claim an above-the-line deduction for these payments. For divorces finalized after 2019, neither the paying nor receiving spouse needs to report alimony to the IRS.
State-Specific Rules
It’s essential to note that alimony payments can be handled differently depending on your state. For example, in California, payments on community property income are not considered alimony. Be sure to consult your state’s revenue department website for more information on how to report spousal support for state tax purposes.
Claiming Dependents and Child Tax Credit
In general, the custodial parent should claim the child as a dependent to receive the child tax credit. However, this can depend on the divorce decree, which may specify a different approach. Some parents may agree to take turns claiming the dependent every other tax year. According to the IRS, the custodial parent is the parent with whom the child or dependent lives for the majority of the tax year.
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