Amid the multitude of inquiries tax professionals make during high season, the most fundamental thing is to be able to step in with confidence. This is why AccountingWEB is working with JK Lasser to create the necessary boost of security that practitioners need most at this crucial time of year.
The season is full of targeted questions, from changes to forms and tax codes to processes and procedures for individuals and businesses. We trust that this series of articles and additional information from authors Barbara Weltman and Elliot Eiss will ease the burden a little.
Hopefully this next article will benefit your customers dealing with alimony and the related tax return changes.
Put simply, the tax rules on child support have changed. Whether or not maintenance payments made in 2019 are taxable for the recipient and deductible by the payer depends on when a divorce decree or a separation agreement was concluded:
• For decrees and agreements after 2018, maintenance is not taxable for the recipient or deductible by the payer.
• For decrees and agreements before 2019, maintenance is taxable for the recipient and deductible by the payer. The maintenance rules for these payments have not changed.
If a divorce or separation instrument was executed before January 1, 2019, but it was changed on or after that date, the post-2018 rules will apply if the change specifically states that alimony payments are non-deductible by the payer or taxable for the recipient are.
Old rules for old divorces unchanged
For decrees and agreements before 2019, payments are only eligible if all of the following conditions are met:
• Payments will be made in accordance with a divorce or separation decree, written separation agreement, or support decree. Voluntary payments do not count.
• Payments are made in cash. Payments can be made to the ex-spouse or on behalf of a former spouse (e.g. paying the ex-spouse’s rent). There is no minimum withdrawal deadline, but if payments exceed $ 15,000 in the first or second year but are reduced by more than $ 15,000 in the second or third year, there will be some recovery. (ie previously deducted payments are reported as income).
• The parties do not belong to the same household. they live separated.
• The liability of the payer must end with the death of the recipient.
Reporting requirements
In order for the IRS to know how to handle alimony payments, certain information must be entered on Appendix 1 of Form 1040 or 1040-SR.
• If maintenance is deductible, payments will be deducted in accordance with Appendix 1 (Form 1040 or 1040-SR), even if the payer claims the standard deduction instead of listing the deductions. The payer must enter the date of the original divorce or separation agreement and the social security number of the recipient’s spouse. Otherwise, the deduction may not be allowed and the payer may owe a $ 50 penalty. If more than one ex-spouse is receiving alimony, include the Social Security number of one of them in Appendix 1 and provide similar information for the other) on a separate statement attached to the return.
• For the recipient of taxable alimony, report the payments and record the date of the divorce or separation agreement in Appendix 1 (Form 1040 or 1040-SR). The recipient is required to give their social security number to the ex-spouse and may be fined $ 50 if not given.
A copy of the divorce decree or separation agreement does not have to be enclosed with the return.
Side effect of the new rules
Recipients of taxable alimony can treat the payments as compensation for making a contribution to an IRA. This means that under the new rules, recipients of tax-free child support will not be able to fund an IRA that is based on child support payments.
The changes to the maintenance regulations have no impact on the tax treatment of child benefit. Such payments are still tax-free for the parents who receive them. They cannot be deducted by the parent paying them.
Likewise, the amendments to the maintenance rules do not affect the transfer of property between spouses involved in a divorce. Generally, such transfers are tax-free exchanges.
The transferring spouse realizes no gain or loss and the transferring spouse takes ownership of the transferor’s base. Ultimately, the spouse of the acquirer will make a gain or loss on the sale of the property (unless held until death).
Legal fees for maintenance payments are not deductible. For decrees and agreements prior to 2019, legal fees were deductible as other individual deductions, subject to the lower limit of 2 percent of adjusted gross income.
However, this deduction is suspended for the years 2018 to 2025. Legal fees can never be deducted for decrees and agreements after 2018, as maintenance payments are not taxable.
Conclusion
It is imperative that tax filers inquire about the details of any alimony payments so that they can be properly handled in relation to the payer’s and recipient’s tax returns.
| JK Lasser’s Your Income Tax 2020 gives you step-by-step instructions for an easy, hassle-free filing process. Download the book here. |
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