maintenance is taxable
Alimony has two important tax statuses. If you finalized your divorce before January 1, 2019, the person collecting alimony will pay tax on that money. This means that the alimony payer can fully deduct the payments from tax, while the alimony recipient is taxed on this as income. Congress amended this law in the 2017 Tax Cut Act. For all divorces consummated on or after January 1, 2019, the person paying alimony pays tax on that money. This means that the alimony payer cannot claim a tax deduction on the payments, while the alimony recipient pays no tax on that income.
You can work with a financial advisor who will give you peace of mind in managing your investments and your overall finances.
What is alimony?
Alimony or spousal support is required when an ex-spouse is required to make periodic payments to the other ex-spouse after the divorce. Each state has its own laws governing this issue and the specific details of a child support agreement, such as:
Not every payment made through a divorce counts as alimony. If you make payments under a divorce or separation agreement, the IRS considers it alimony or spousal support if the following criteria are met:
They were legally married for tax purposes, so they could have filed a joint tax return.
You are no longer married for tax purposes, so you cannot submit a joint tax return.
Payments are a transfer of money, not in kind or otherwise.
You are making these payments based on a legally enforceable divorce or separation agreement.
They no longer belong to the same household, so they cannot have the same legal residence.
Payment is made to and on behalf of the ex-spouse.
Payment is not to cover child support, property payments, or other obligations.
If your arrangement meets these criteria, the IRS will most likely consider it alimony for tax purposes.
The story goes on
Child support payments before 2019
maintenance is taxable
If your divorce or separation agreement was finalized on or before December 31, 2018, federal income taxes on alimony will be paid by the person receiving it. This means:
If you are the person issuing the alimony payments, you can deduct those payments in full from your federal income taxes. This income is transferred to the other part of your previous household and therefore does not count as your income.
If you are the person receiving alimony, you must include those monies as part of your income for federal income tax purposes. As above, this income has been transferred to your part of the previous household, so you will be responsible for any tax thereon.
It’s important to note that this only applies to federal income taxes. Each state has its own tax laws, and it is beyond the scope of this article to discuss the specific regulations of each US state and territory. Be sure to check the status of your own state’s income tax laws.
Maintenance payments after 2019
The Tax Cuts and Jobs Act of 2017 made several sweeping changes to US tax laws. Among these, the law has reversed the position on alimony. For any divorce or separation agreement entered into on or after January 1, 2019, or any agreement materially modified on or after that date, federal taxes on alimony will be paid by the person making those payments. This means:
If you are the person issuing the alimony payments, you cannot deduct those payments from your federal income taxes. You are responsible for reporting this income before you transfer it to the other part of your former household.
If you are the person receiving alimony, you do not need to include those monies as part of your income for federal income tax purposes. The taxes on this income have already been paid by the ex-spouse issuing the payments. As above, this only applies to federal income taxes. Be sure to check the status of child support and income tax in your state or territory to determine your obligations under these rules.
Why is only one spouse paying child support?
The tax status of alimony is based on the legal theory of spousal maintenance. Strictly speaking, alimony payments function as a transfer of income. During a marriage, both parties share and pay tax on their income as a single household. After marriage, maintenance requires that you continue to do so in some cases.
Originally, this was based on the idea that women needed a man to support them. Her father would do this until her husband took over. After a divorce, the law would require a woman’s ex-husband to support her for a specified period of time. Although widely discredited and outright rejected by the Supreme Court in 1979, some elements of this idea endure in practice. Most notably, it is common for states to allow child support conditions that last until the recipient either remarries or retires.
The alimony theory is crucial because it determines the tax status of the system. Despite the terminology, alimony is not a payment system but a transfer system. The two parties continue to share a portion of the former household’s income, which one ex-spouse transfers to the other. This means only one person owes taxes on the shared income as it is still considered money shared by a single household.
The final result
maintenance payments are taxable
Alimony payments are always taxed by one party. If you finalized your divorce before 2019, the person will receive the money. If you finalized your divorce after 2019, it’s the person who makes the payments. These payments are not tax deductible for the alimony payer. It’s important to prepare your finances to handle those tax payments when you pay child support.
Personal finance tips
Once you’re married, it’s time to start planning for two. Finances are one of the things that are most affected by both marriage and divorce, so it is important to prepare your finances properly now. You can work with a financial advisor to properly prepare yourself financially for the big day. With SmartAsset’s free tool, you can find a financial expert in your area to ensure you make those plans wisely and well, because once someone else is in the picture, it’s time to really get those finances in shape, start Now.
Marriage and divorce might be the two biggest tax events of all. Not only is there a marriage bonus in your year-end taxes, but turns out there’s a marriage penalty as well.
©iStock.com/designer491, ©iStock.com/fizkes, ©iStock.com/Vladimir Vladimirov
The contribution Is maintenance taxable? appeared first on the SmartAsset Blog.