Taxability-of-Alimony-in-USA

Taxability of Alimony in USA

  1. What is Alimony: - Alimony is payment made by a spouse to his/ her former spouse as per the clauses made under the “divorce or separation instrument”. Payments made to former spouse as per the written separation agreement subject to the State Laws will be treated as alimony whether or not the same are specifically mentioned in the divorce decree.

Divorce or separation instrument is defined as under: - 

  • A decree of divorce or separate maintenance or a written instrument incident to that decree.

  • A written separation agreement

  • A decree or any type of court order requiring a spouse to make payments for the support or maintenance for the other spouse. This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement).

 

  1. Do all payments under divorce or separation agreement are Alimony?

NO, all payments done as per the divorce or separation agreement are not Alimony and following are the certain payments which are expressly excluded from the definition of Alimony by the Internal Revenue Service (IRS):


 








 

*1 Payment specifically designated or treated as specifically designated as child support in divorce or written separation agreement is not treated as Alimony. 

*2 Transfer of services or property (including a debt instrument of a third party or an annuity contract) & Execution of a debt instrument by the payer are not included in Alimony. 

 

Cash payments to third party on behalf of the formers spouse under the terms of divorce or separation agreement can be Alimony, if they otherwise qualify. These include medical expenses, housing cost (rent, utilities, etc.), taxes, tuition etc.

 

  1. Conditions to be fulfilled for consideration of the payment made to former spouse under the head of “Alimony”

The first and foremost requirement to qualify the payment as Alimony is that Payer and Recipient Spouse must not file Joint Return with each other. Following are the other rules for alimony apply to payments under divorce or separation instruments executed after 1984: -

  • Payments should be made in Cash (including checks or money orders). Cash payments made to third party under the terms of divorce can qualify as cash payments to the former spouse.

  • Payments made to former spouse is required to be paid under the divorce or written separation agreement. Voluntary payments will not qualify for Alimony.

  • Payments isn’t designated in the divorce or written separation agreement as “NOT Alimony”. Spouses have the option to include the provision in the instruments that the payments made to former spouse aren’t treated as Alimony.

  • Payments made to former spouse while you both are the members of the same household aren’t qualified for Alimony if you are legally separated under the instrument. If the spouses are legally separated under the divorce decree or written separation agreement, the payment made to former spouse may be qualify as Alimony even if you both are the members of the same household.

  • Spouse is not liable to continue the payments even after the death of the former spouse. If s/he is doing so, then such payments aren’t qualified as Alimony, even if any such amount is paid before the death of the former spouse. 

  • Payments made under the divorce agreement for the child support aren’t treated as Alimony.

 

  1. Taxability of Alimony 

Payments qualify for Alimony (if the above conditions are fulfilled), made under the divorce or written separation agreement executed before 1st January 2019, are deductible by payer and same is taxable in the hands of the recipient. Post 2018, that is instruments executed after 31st December 2018, alimony paid by the spouse isn’t deductible by payer nor the same is included in the gross income of the spouse who is receiving the payment. If the divorce or written separation agreement is executed before 2019 while the same is modified after 31st December 2018, and the modification changes the terms of the alimony or separate maintenance payments and it expressly states that the payments aren’t deductible by the payer, only then the Post 2018 Alimony rules are applied to that payments. 

Particulars

Tax Treatment

For Payer Spouse

For Recipient Spouse

Original Agreement

- Executed before 1st January 2019

Deductible

Taxable

- Executed after 31st December 2018

Not Deductible

Not Taxable

Agreement Modified after 31st Dec’18 made before 1st Jan’19

-Terms of payments modified and expressly states that new rule applies

Not Deductible

Not Taxable

-Terms of payments modified but expressly doesn’t states that new rule applies

Deductible

Taxable