If you are divorced and have young children, there's a good chance that you are paying or receiving alimony or child support (or both) under a divorce decree. What's the difference? The distinction is important to the IRS.
Currently, alimony is deductible by the party who pays it and taxable to the party who receives it. Child support is neither deductible nor taxable.
Depending on what side of the fence you're on, you should negotiate for payments to be characterized as either "alimony" or "child support" as part of a divorce agreement.
How to qualify for alimony deductions
Just saying that payments are alimony won't suffice. According to the IRS, these are the requirements that must be met if you're hoping to qualify for alimony deductions:
- You don't file a joint return with your ex-spouse
- Payments are made in cash or an equivalent
- Payments follow the instructions of a divorce or separation agreement
- The agreement doesn't designate the payment as not being alimony
- You and your spouse aren't members of the same household when the payment is made
- There's no liability for making the payment after your spouse dies
The following alimony payments aren't considered deductible:
- Non-cash property settlements in a lump-sum or installments
- Payments that are a spouse's part of community property income
- Payments to keep up the property owned by the person paying alimony
- Use of the property owned by the person paying alimony
- Voluntary payments
The terms can often be worked out to the satisfaction of both parties. For instance, the deduction for alimony can be valuable to someone who pays alimony and earns more while the taxable income may not cause any dire consequences to someone who earns less.
According to the new tax bill, alimony will not be deductible or taxable starting in 2019. This may also affect divorce and separation agreements executed in 2018 and modified in 2019 and beyond.
Keep these rules in mind when your 2017 tax return is filed. We can help you determine tax issues related to your alimony payments. Give us a call.
