Is alimony taxable?

Alimony or spousal support payments are tax deductible by the payer and taxable income to the supported spouse on separation or divorce agreements signed before 2019.  Beginning in 2019, under the 2017 Tax Cuts and Jobs Act, there are new rules: there is no tax deduction for the payer for alimony payments and recipients of the payments will no longer report such payments to the IRS as taxable income.

Child support payments, on the other hand, are typically not deductible from the income of the payer and are not included as taxable income to the supported spouse.

According to the Federal Internal Revenue Code, ” … any payment which the terms of the divorce or separation instrument fix (in terms of an amount of money or a part of the payment) as a sum which is payable for the support of children of the payer spouse” is not considered alimony or a separate maintenance payment. Thus, such payments are a tax neutral event (they are non-taxable to the person receiving them and non-deductible to the person making them).

Federal Income Tax Regulations state:

“A payment is fixed as payable for the support of a child of the payer spouse if the divorce or separation instrument specifically designates some sum or portion (which sum or portion may fluctuate) as payable for the support of a child of the payer spouse. A payment will be treated as fixed … if the payment is reduced (a) on the happening of a contingency relating to a child of the payer, or (b) at a time which can clearly be associated with such contingency. … For this purpose, a contingency relates to a child of the payer if it depends on any event relating to that child, regardless of whether such event is certain or likely to occur. Events that relate to a child of the payer include the following: the child’s attaining a specified age or income level, dying, marrying, leaving school, leaving the spouse’s household, or gaining employment.”

Thus, under Federal income tax law, regardless of the label that is used, most child support payments are a tax neutral event, while most support payments under divorce or separation agreements signed before 2019 provided to the other (former) spouse are deductible to the payer and included in the taxable income of the supported spouse. Starting 2019, the spouse paying the alimony cannot deduct the payments and the ex-spouse who receives the payments no longer has to pay taxes on them.

Case Studies: Tax Implications of Alimony Payments

Case Study 1: Pre-2019 Alimony Agreement

In a divorce settlement finalized in 2018, the agreement stated that the payer spouse would provide monthly alimony payments to the supported spouse. As per the tax laws in effect at the time, the payer spouse was able to deduct the alimony payments from their taxable income, reducing their overall tax liability.

The supported spouse, in turn, reported the alimony as taxable income and paid taxes accordingly. Insurance considerations may involve life insurance policies where the payer spouse is required to maintain coverage to secure the alimony obligation.

Case Study 2: Post-2019 Alimony Agreement

In a divorce settlement finalized in 2021, the agreement specified that the payer spouse would provide monthly alimony payments to the supported spouse. However, as per the tax laws changed by the 2017 Tax Cuts and Jobs Act, alimony payments made under this agreement are no longer tax deductible for the payer spouse. The supported spouse is not required to report the alimony as taxable income.

The change in tax treatment impacts the financial considerations and planning for both parties involved in the agreement. Insurance considerations may involve the need for alternative risk management strategies in light of the loss of the tax deduction.

Case Study 3: Child Support vs. Alimony

In a divorce settlement, the agreement included both child support and alimony provisions. The child support payments were specifically designated for the support of the children and were tax neutral events for both parties. The alimony payments, however, were deductible by the payer spouse and considered taxable income for the supported spouse.

The distinction between child support and alimony payments is crucial in determining the tax treatment of each type of support. Insurance considerations may involve life insurance policies to secure child support obligations and potential insurance coverage to protect against potential loss of alimony income in case of the payer’s death or disability.