Alimony and spousal support awards can be substantial, transferring tens of thousands of dollars from one ex-spouse to the other. Someone must pay taxes on all this money, but who?
The Tax Cuts and Jobs Act of 2018 changed the tax rules for alimony. However, everything depends on when you entered into the alimony agreement or received your alimony decree. Some people who receive alimony will continue to be taxed, while others will not.
Below, our spousal support lawyer considers different scenarios to help our readers better understand the rules. Contact us if you have a question or want to seek a modification.
Scenario #1: Alimony Award Issued Before 2019
The Tax Cuts and Jobs Act changed how alimony is taxed but only for those who received their alimony award or entered into an alimony agreement after January 1, 2019. What happens if you have an alimony award from before 2019?
In that case, the old rules apply. And, according to the old rules, the person who receives alimony must report it as income and pay taxes on it. The spouse who pays alimony can claim the amount as a tax deduction if certain conditions are met, e.g., not filing a joint tax return and paying alimony in cash.
For example, Michael might pay his ex-wife Melissa $1,000 a month in alimony. Melissa will need to report the $12,000 she received on her tax return and pay taxes. Things would be different if Michael and Melissa received their divorce decree in 2019 or after.
Remember, what matters is when you entered into your alimony agreement or received your divorce decree. Check the date. If it is before 2019, then the old rules remain into effect going forward, unless there is a modification.
Scenario #2: Alimony Award Issued In 2019 Or Later
The rules changed in this situation. Here, the spouse paying alimony reports it on his or her tax return and pay taxes on the amount. Meanwhile, the spouse who receives the alimony takes it tax-free.
For example, Mary might be ordered to pay her ex-husband Kevin $1,500 a month in alimony. Although Mary pays $18,000 in total for the year, she still needs to report this amount and pay taxes on it when she filed her taxes. This definitely increases her tax bill, which might seem unfair but is the law. Kevin, meanwhile, gets his $18,000 tax-free.
Realize that the Tax Cuts and Jobs Act is slated to expire in 2025. After that point, the government might decide to change the rules again or revert to the old rule. You should meet with an attorney to discuss options if the 2025 deadline is approaching and you are considering divorce.
Scenario #3: Modified Alimony
Let’s say you have an alimony decree that predates 2019, so the old rules are in effect. If you are the recipient, this means you are paying taxes on the alimony you receive. Is it possible to change the decree to garner the benefit of the new rule? Yes, with a modification.
Ohio law allows an ex-spouse to request a modification of the alimony award if there has been a “substantial” change of circumstances. For example, one spouse might have lost a job or gained a promotion. Alternatively, one spouse could become disabled or finally retire from working.
When seeking a modification, it is vitally important to make sure the court order states whether the repeal of the alimony deduction will apply. For example, Sam and Tracy might have divorced in 2017, with Sam ordered to pay alimony. This means that the alimony Tracy receives under the agreement must be reported as income and taxed. However, Tracy decides to modify the alimony award to account for a recent disability. Tracy could request that the modification include the repeal of the alimony deduction so that she can now avoid paying taxes.
Confused? Contact One Of Our Attorneys
The recent change in the alimony tax rules has been controversial. Many spouses now fight aggressively to avoid paying alimony at all if they can no longer claim it as a deduction on their taxes. The change in tax law has also impacted how we analyze the distribution of marital property and other issues in a divorce.
If you need assistance with spousal support, please contact Lawrence Law Office today. One of our divorce lawyers can discuss how best to approach alimony negotiations or a modification of an alimony award. Contact our law firm to schedule an initial consultation.