Kelly Bullis: Alimony deduction rules

How many of you thought alimony was no longer deductible? Well, it is still deductible, but only for divorces that occurred prior to 2019. (There are a lot of folks paying alimony from pre-2019 divorces or legal separation agreements.)

Prior to 2019, the prevailing thought was, if one person had to pay some of their income to a former spouse, then it was only fair that they shouldn’t have to pay income tax on that, instead the former spouse should pay the tax. Thus, the payer got a deduction for alimony paid and the recipient reported the alimony as income.

Along came the Trump tax law of 2017. IRS had provided a long list of complaints they wanted fixed and Congress in 2017 obliged them. One of the IRS complaints was the constant abuse of deducting legitimate alimony and the non-reporting by many alimony recipients. The simple solution was to just get rid of the whole thing. Make the alimony payer pay all the tax and let the alimony recipient receive the payments, tax free. Unfair, but from the IRS perspective, easier to administer.

Under the pre-2017 tax law, qualifying alimony had to meet certain rules. Such as, the payments had to be made under a written divorce decree, separate maintenance decree, or written separation agreement. In those agreements, they can’t say the payments are not alimony. (Example, if they are listed as being for assisting in maintaining the mortgage, or helping pay tuition for school, etc., it cannot be considered “alimony.”) They must also state that the payer’s liability ONLY ends upon the death or re-marriage of the recipient.

Also, non-cash settlements or child support are not considered alimony. Lump-sum payments of alimony arrearages retain their character as alimony for tax purposes. In other words, if the underlying spousal support obligation originally qualified as alimony, then back payments are treated as deductible (and correspondingly reportable taxable income by the recipient).

These limitations happen to be the reason the IRS hates alimony deductions. They claim that many alimony deductions do not meet the strict rules as listed here.

Even though all divorces from 2019 on don’t get an alimony deduction, nor must report alimony as income, as I mentioned earlier, most divorces are still pre-2019 and thus, the old rules are still in play. You get to deduct your qualified alimony payments and your ex must report them as income. And that is still frustrating the IRS.

Thus, alimony deductions are considered a high-risk audit red flag. So, if you qualify to deduct your alimony payments, make sure you meet the criteria. If you are a recipient of those pre-2019 alimony payments, you must be reporting them as income. Know that your ex is reporting your Social Security number on their tax return. It will only take a little work on the IRS’ part to see if you reported it or not.

Have you heard? Proverbs 12:17 says, “Whoever speaks the truth gives honest evidence, but a false witness utters deceit.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.