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Get to Know the New Tax Rules for Alimony in 2019 Returns

As we're in the thick of busy season, numerous tax questions have arisen from clients that correlate with a myriad of changes in tax filing rules. One such example -- for individual filers -- is for divorced couples with alimony payments.

Mar 3rd 2020
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Amid the myriad of requests tax professionals make at busy season, the most basic is to be able to go in with confidence. As such, AccountingWEB is working with J.K. Lasser to help provide that needed boost of assurance practitioners need most at this crucial time of year.

The Season is fraught with pointed questions, from changes in forms and tax codes to processes and procedures for individuals and businesses. We trust that this article series and additional information from authors Barbara Weltman and Elliot Eiss will lighten the load a bit.

This next article will hopefully benefit those clients of yours who are dealing with alimony payments, and the tax filing changes that go along with them.

Simply put, the tax rules governing alimony payments have changed. Whether alimony made in 2019 are taxable to the recipient and deductible by the payer depends on when a divorce decree or separation agreement was finalized:

• For post-2018 decrees and agreements, alimony is not taxable to the recipient or deductible by the payer.

• For pre-2019 decrees and agreements, alimony is taxable to the recipient and deductible by the payer. The alimony rules have not changed for these payments.

If a divorce or separation instrument was executed before January 1, 2019, but it is modified on or after this date, the post-2018 rules apply if the modification expressly states that alimony will not be deductible by the payer or taxable to the recipient.

Old Rules for Old Divorces Unchanged

For pre-2019 decrees and agreements, payments are deductible alimony only if all of the following conditions are met:

• The payments are made pursuant to a decree of divorce or legal separation, a written separation agreement, or a decree of support. Voluntary payments don’t count.

• The payments are in cash. Payments can be made to the former spouse or on behalf of a former spouse (e.g., paying the former spouse’s rent). There is no minimum payout period, but if payments in the first or second year exceed $15,000 but are reduced in the second or third year by over $15,000, there will be some recapture.     (i.e., previously deducted payments are reported as income).

• The parties are not members of the same household; they live apart.

• The payer’s liability must end of the death of the recipient.

Reporting Requirements

In order for the IRS to know how alimony payments should be treated, certain information is required to be entered on Schedule 1 of Form 1040 or 1040-SR.

• If alimony is deductible, the payments are deducted on Schedule 1 (Form 1040 or 1040-SR) even the payer claims the standard deduction rather than itemizing deductions. The payer must enter the date of the original divorce or separation agreement and the Social Security number of the recipient-spouse. Otherwise, the deduction may be disallowed and the payer may owe a $50 penalty.If deductible alimony is paid to more than one ex-spouse, enter the Social Security number of one of them on Schedule 1 and provide similar information for the other(s) on a separate statement attached to the return.

• For the recipient of taxable alimony, report the payments and enter the date of the divorce or separation agreement on Schedule 1 (Form 1040 or 1040-SR). The recipient must give the ex-spouse his or her Social Security number and could be subject to a $50 penalty if this is not done.

A copy of the divorce decree or separation agreement does not have to be attached to the return.

Ancillary Impact of the New Rules

Recipients of taxable alimony can treat the payments as compensation for purposes of making a contribution to an IRA. This means that recipients of tax-free alimony under the new rules cannot fund an IRA based on alimony payments.

The changes in the alimony rules have no impact on the tax treatment of child support. Such payments continue to be tax free to the parent receiving them. They are not deductible by the parent paying them.

Similarly, the changes in the alimony rules have no effect on transfers of property between spouses incident to divorce. Generally, such transfers are tax-free exchanges.

The transferor-spouse does not realize gain or loss and the transferee-spouse takes the transferor’s basis in the property. Ultimately, the transferee-spouse will realize gain or loss when the property is disposed of (unless held until death).

Legal fees to obtain alimony payments are not deductible. For pre-2019 decrees and agreements, the legal fees had been deductible as miscellaneous itemized deductions subject to the 2 percent-of-adjusted-gross-income floor.

However, this deduction is suspended for 2018 through 2025. For post-2018 decrees and agreements, no deduction for legal fees can ever be claimed because the alimony payments are not taxable.

Conclusion

Tax return preparers must be sure to inquire about the details of any alimony payments so they can be handled properly on the payer’s and the recipient’s returns.

J.K. Lasser's Your Income Tax 2020 gives you step-by-step instructions for easy, stress-free filing.
Download the book here.

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