2018 note: The Tax Cuts and Jobs Act (TCJA) of late 2017 eliminates for federal income tax purposes the deductibility of spousal support beginning in 2019 with new divorce agreements. However, for state income tax purposes, California still allows the deductibility of spousal support for the payer and treats spousal support received as taxable income.
Unless spouses agree otherwise in their final divorce documents, spousal support (alimony) is generally tax deductible for the payer and reportable as income for the recipient. But there are a number of spousal support tax considerations and rules that need to be followed. These include the following five points from the IRS:
- Spousal support is defined as a payment to or for a spouse or former spouse under a divorce or separation instrument. This “instrument” must be a written separation agreement or any type of court order requiring spousal support payments.
- These payments qualify as spousal support if all of the following are true:
- The payments are made in cash, check or money order;
- No portion of the payments are considered child support;
- The spouses are not living in the same household (not a requirement for temporary, pre-divorce support);
- They don’t file a joint tax return;
- The payer has no liability to make any payments after the recipient spouse dies;
- The instrument does not designate the payments as not being spousal support.
- Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be considered spousal support, if they otherwise qualify. Spousal support also includes premiums you must pay under your instrument for insurance on your life to the extent your spouse owns the policy.
- Spousal support does not include voluntary payments that are not made under a divorce or separation instrument. Payments that come from your spouse’s part of marital community income are also not spousal support.
- Spousal support also does not include provision of services, noncash property settlements, use of the payer’s property, and payments to keep up the payer’s property. However, if your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse or former spouse, some of your payments may qualify.
Other Spousal Support Tax Considerations
Spousal support tax deductibility is only of value if the payer is in a higher tax bracket than the recipient. If this is the case, the additional tax paid by the recipient is more than offset by the reduced taxes for the payer. It is customary to share this tax savings. Otherwise only the payer benefits and the recipient is worse off.
In 2010 there were 567,887 federal tax returns deducting a total of $10 billion in spousal support. Nearly half of the corresponding returns of the recipients did not match. The net difference was $2.3 billion. Of the 266,190 unmatched returns, the IRS opened examinations on 10,870. This led to further examinations of recipients in just over 2,000 cases. So currently the chances of IRS pursuing unmatched returns from a couple are fairly small.
The IRS has “alimony recapture” rules that apply to spousal support payments that rapidly fall off in amount over the first three years. These rules take away spousal support tax deductibility. Generally, if you want a spousal support tax deduction for spousal support totaling more than $15,000, the payments need to last more than three years.
If you think your spousal support tax situation is complex or if there is a lot of money involved, you may be wise to consult a tax specialist.