Do You Have to Pay Taxes on Spousal Support?
Do You Have to Pay Taxes on Spousal Support?
When going through a divorce or separation, spousal support (also known as alimony) is often part of the financial arrangement. But one common question many people have is whether they need to pay taxes on spousal support payments they pay or receive — and the answer depends on the timing of your divorce.
What is Spousal Support?
Spousal support, also known as alimony, is financial assistance provided by one spouse to the other after a divorce or separation. The purpose of spousal support is to help the lower-earning spouse maintain a similar standard of living to that enjoyed during the marriage. There are two main types of spousal support: temporary and permanent. Temporary support is awarded during the divorce process, often to maintain financial stability until the final settlement is reached. In contrast, permanent support may be awarded after the divorce is finalized, typically when one spouse is unable to support themselves due to factors like long-term health issues or lack of work experience. The duration and amount of support depend on factors such as the length of the marriage, the recipient's needs, and the paying spouse's ability to contribute.
Tax Treatment of Spousal Support
The tax treatment of your spousal support payments depends on when your divorce was finalized. If your divorce was finalized before 2019, meaning December 31, 2018, or before, spousal support payments follow the pre-Tax Cuts and Jobs Act rules: (1) The person making the payments can deduct them from their taxable income, reducing their overall tax burden; (2) the recipient is required to report the payments as taxable income and pay taxes on them. This structure provides a financial benefit to the paying spouse while imposing a tax liability on the recipient.
However, this changed with the Tax Cuts and Jobs Act of 2017, which eliminated these tax deductions and obligations for divorces finalized after December 31, 2018. If your divorce was finalized on January 1, 2019, spousal support is no longer deductible for the paying spouse, nor is it considered taxable income for the recipient. This means that the person making the payments cannot reduce their taxable income by the amount of spousal support, and the recipient does not have to report the payments as income on their tax return. This change applies to all divorces finalized after the specified date. As a result, both parties must plan their finances accordingly, without the previous tax benefits or burdens related to spousal support.
Special Considerations
While the tax treatment of spousal support is generally determined by law, divorcing couples can still negotiate terms that address the financial impact of these changes. One way to contract around the tax treatment is by including provisions in the divorce agreement that adjust the amount of spousal support to account for the loss of tax deductions or the elimination of tax obligations. For instance, the paying spouse may agree to provide a higher amount of spousal support to offset the fact that it is no longer deductible. Similarly, both parties could agree to a different financial arrangement that considers the tax implications. It's important to work with legal and tax professionals to ensure these provisions are properly drafted and enforceable.
Consult a Professional
We encourage those with questions about the tax implications of their spousal support payments to consult a tax or accounting professional. If you have questions about spousal support or need guidance through the divorce process, contact an experienced attorney today to ensure your rights are protected and you understand your options.
