Taxation of Alimony, Separate Maintenance Payments, and Child Support
When a married couple becomes divorced or legally separated, state law generally provides for the payment of alimony or separate maintenance payments, which is a periodic money transfer from one spouse to the other. Alimony and separate maintenance payments are generally deductible by the spouse making the payments and are includable in the income of the spouse receiving the payments.
Under the new tax package passed by the Republicans at the end of 2017, known as the Tax Cuts and Jobs Act, alimony will no longer be deductible by the payer nor does the receiver of the alimony have to include it in their income. The marginal tax rate of the payer will apply to the portion of income paid as alimony. However, this new provision only applies to divorce and separation agreements signed after 2018. The provision will also apply to divorce and separation agreements modified after 2018, where the modification specifically states that alimony payments will not be deductible for the payor nor taxable to the recipient.
The amount of alimony received is listed on the Alimony received line under the Income section of Form 1040. The payer of alimony can deduct the amount by listing it on the Alimony paid line under the Adjusted Gross Income section of Form 1040, where the recipient's Social Security number must also be listed. If payments are made to more than one ex-spouse, then their names and social security numbers should be listed separately and attached to the payer's tax return.
This tax treatment of alimony does not apply to voluntary payments — it requires that the alimony be stipulated by any of the following:
- a decree of divorce or legal separation
- a decree of support; or
- a written separation agreement.
- payments must be cash to the spouse or ex-spouse or to a third-party for the benefit thereof
- the parties reside in separate households
- separate tax returns are filed and the payer includes the Social Security number of the recipient
- the payments are not for child support, which is not deductible by the payer
IRC §215 does allow the spouses to treat the payments as nontaxable if it is stated in the divorce decree or separation agreement. A copy of the agreement must be attached to the taxpayers' tax returns for each year that it applies. Note that any payments made to the receiving spouse that are not taxable as income cannot be deducted by the paying spouse. A U.S. citizen making payments to an ex-spouse who is a nonresident alien must withhold 30% of the payment for income taxes, unless a tax treaty with the ex-spouse's country provides otherwise. If a spouse provides alimony through the purchase of an annuity for the ex-spouse, then the purchase is not tax-deductible to the payer, but the income provided by the annuity is taxable to the recipient. Any increase in the payments must be approved by the court; otherwise, the voluntary payments are not a taxable transfer.
The payment of alimony is a taxable event only if the spouses lived apart, unless the spouses are separated under a written agreement but are not legally separated yet. Another exception allows for the payment of alimony for the month before the other spouse leaves.
If a court orders that an ex-spouse receives an interest in a qualified retirement plan of the former spouse, then that income is taxable to the recipient. However, a trustee-to-trustee transfer of retirement accounts, or a simple changing of names on an account, between the 2 spouses as the result of a court order is not a taxable event.
Although there is usually a division of property, this transfer of property is not a taxable event. The transferor cannot deduct the value of the property nor does the transferee have to include it in her income. However, the transferee does receive the carryover basis of the transferor.
Example: A husband transfers stock that is worth $10,000 and for which he paid $4,000 to his ex-wife. Although his ex-wife does not have to recognize the value of the stock until she sells it, her tax basis in the stock is the same as her ex-husband's. So if she sells the stock for $20,000, then her capital gain is $20,000 – $4,000 = $16,000.
Distinguishing Between Alimony and Property Transfers
Because alimony is a taxable event while property transfers are not, Congress developed rules to distinguish alimony from property transfers in certain cases that were previously uncertain. These rules apply to divorce decrees and agreements made after 1984. Payments are considered alimony only if:
- the payments are in cash;
- the agreement or decree does not specify that the payments are not alimony;
- the payer and payee are not members of the same household when the payments are made;
- the transfers end after the death of the payee.
Cash payments distinguish alimony from a property division since alimony payments are made so that the spouse with less money can maintain her standard of living, and there would be no alimony if the 2 spouses did not maintain separate households. Because the payments are made on behalf of the payee, a property settlement cannot be disguised as alimony, since, if the spouse received the property, her estate would still benefit from the income earned from the property — hence, it would not have been a cash payment.
So that spouses do not attempt to disguise a property division as alimony, tax law provides special rules if the amount of alimony declines more than $15,000 in the 3rd year. Alimony recapture rules apply when the 1st and 2nd year payments exceed $15,000, but the 3rd-year payment drops by more than $15,000. In this case, the alimony recapture is figured by applying the following formula:
- If 2nd Year Payment – 3rd-Year Payment > $15,000, then
- Recapture Amount for 2nd Year = 2nd Year Payment – 3rd-Year Payment – $15,000
- Recapture Amount for 1st Year = 1st Year Payment – (2nd Year Payment – 2nd Year Recapture Amount + 3rd-Year Payment)/2 – $15,000
- Total Recapture Amount = 1st Year + 2nd Year Recapture Amounts
If the recapture amount is zero or less, then there is no recapture for that year. When there is alimony recapture, then the payer will have to add the recaptured amount back to his income by putting the amount in the Alimony received line, crossing out received and replacing it with recapture, while the payee deducts the amount from her income by adding the recaptured amount as Alimony paid line, crossing out paid and replacing it with recapture, on Form 1040.
Example — Alimony Recapture
- Husband pays wife the following amounts in alimony:
- 1st Year Payment = $50,000
- 2nd Year Payment = $38,000
- 3rd Year Payment = $20,000
- $38,000 – $20,000 > $15,000 so:
- 2nd Year Recapture Amount = $38,000 – $20,000 – $15,000 = $3,000
- 1st Year Recapture Amount = $50,000 – ($38,000 – $3,000 + $20,000)/2 – $15,000
- = $50,000 – $55,000/2 – $15,000 = $50,000 – $27,500 – $15,000 = $7,500
- Total Recapture Amount = 2nd Year Recapture Amount + 1st Year Recapture Amount = $3,000 + $7,500 = $10,500
- On the husband's Form 1040: Alimony paid recapture: $10,500 Recipient's SSN: XXX-XX-XXXX
- On the wife's Form 1040: Alimony received recapture: $10,500
However, alimony recapture rules do not apply when it is obvious that it was not because of a disguised property transfer, such as if one of the spouses dies or if the payee gets remarried. Another common situation where the rules will not apply is when the payment is based on a contingency, such that the amount that will be paid will depend on the income generated in future years, such as by the payer's business. When alimony is reduced within 6 months of a supported child reaching the age of majority, then the IRS will consider that part of the payment to be child support, which is nontaxable and, thus, nondeductible.
The payment of child support is not a taxable event — the payer cannot deduct child support from his taxes nor does the payee have to include the income on her return. This results because both parents have a legal duty to support their child.
Sometimes child support is included as part of the alimony payments. If the amount of the payments decreases within 6 months of when a child reaches the age of majority, or the child gets married or dies, then the reduction amount is considered child support, which is nontaxable to the recipient and nondeductible to the payer.
If payments to a spouse include child support payments along with alimony, then the IRS allocates any deficiency in the payments 1st to child support, then to alimony.
Example: the Allocation of Payments as Child Support and as Alimony
A husband pays $4,000 monthly to his former wife: $3,000 is allocated to the support of the children, and $1,000 is allocated as alimony. However, the husband was unable to pay anything for the last month of the tax year, so the wife received a total of $44,000 instead of $48,000. Therefore, the amount that must be allocated as child support payments = $36,000 (= $3,000 × 12), and the remaining amount of $8000 (=$44,000 – $36,000) must be allocated as alimony rather than the $11,000 that would otherwise have been allocated had the allocation remained the same as the designated monthly allocation. Thus, the husband can only deduct $8,000 instead of $11,000.
- A 2014 study by the Treasury Inspector General for Tax Administration revealed that, in 2010, in half of the tax filings claiming alimony, the deduction claimed did not match the alimony income claimed by the receiver.
- If United States savings bonds were transferred, then any accrued interest will be taxable to the former owner; all interest earned after the transfer will be taxable to the new owner.
- Retirement Plans
- To be treated as alimony, qualified retirement plans must be transferred pursuant to a qualified domestic relations order (QDRO), designating the ex-spouse as the new payee.
- Distributions from retirement plans are taxable to the recipient, even if the spouse or ex-spouse earned the money.
- Transfers of IRAs are treated as alimony if they were required by the divorce decree using a trustee-to-trustee transfer. If the transferor takes a distribution, then pays it to the ex-spouse, then it will be taxable to the transferor.
- Marital Residence
- The transfer of home ownership is tax-free property settlement.
- To qualify for the home sale exclusion, both spouses can include the time that they lived together before the ownership split, and the spouse who no longer lives at the residence can still treat the time occupied by the residing spouse as if he continued to live there. So if the residing ex-spouse continues to live in the house for 10 more years, then sells the property, then the ex-spouse who continues to own part of the residence, but who did not live there for the 10-year period, will still be able to claim the home sale exclusion, even though claiming the exclusion usually requires that the taxpayer have lived in the house in at least 2 of the last 5 years.