Untangling the tax implications of alimony payments

Untangling the tax implications of alimony payments

On Behalf of | Feb 28, 2023 | Post-Divorce Issues |

As tax season rolls around, many individuals paying alimony or spousal support in Rockville, Maryland, may be interested in knowing how the alimony will impact their taxes. In the past, the person who paid could deduct spousal support payments, and the individual receiving them needed to report them as income for tax purposes. In 2023, several factors could impact how alimony payments influence a person’s taxes.

Deductible or not deductible?

In December 2017, the Tax Cut and Jobs Act (TCJA) came into effect, stipulating that alimony payments were only tax deductible if the divorce was finalized by December 31, 2018. Similarly, the alimony recipient was responsible for reporting and paying taxes on their income.

However, in divorces finalized as of January 1, 2019, the individual paying alimony cannot receive a tax deduction. The IRS will no longer consider spousal support as income to the individual who receives it. The same principle applies if an alimony agreement gets modified after December 31, 2019.

How alimony payments affect the taxes of both parties

Alimony payments agreed to before 2019 can positively impact the taxes of both the payer and the recipient. Many alimony payments involve transferring money from a higher net earner to a lower earner. The high earner can distribute some of their income, putting themselves in a lower tax bracket, and the recipient can receive money, but their tax bracket stays unaffected. Currently, individuals who are paying child support for children under the age of 17 can claim a tax credit of up to $2,000 for each child and up to $500 for each child over the age of 17.

It is essential to understand your tax obligations and the potential benefits that come from paying and receiving alimony. Divorce and tax laws can be convoluted, so it is important that you understand them.