After a divorce, filing taxes: Is Alimony taxable?

After a divorce, filing taxes: Is Alimony taxable? ...

When it comes to preparing to file taxes following a divorce, it's possible to be concerned about how your taxes will change. The impacts of divorce on federal taxes aren't as great as they used to be.

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Each state has its own state income tax regulations. The way divorce-related payments and income are treated differs from state to state. Consult your state's taxation authority to see how your state's tax laws will affect you.

Here are a few highlights of divorce's main federal tax issues.

Because of the Tax Cuts and Jobs Act of 2017, alimony or separate maintenance payments related to any divorce or separation agreements made on January 1, 2019, or later are no longer considered income. The person paying the alimony does not have to declare the alimony payments as income.

Alimony payments were tax-deductible by the person making the payment, but the person receiving the alimony had to declare it as income on their federal tax return prior to the tax cuts and jobs legislation.

The Tax Cuts and Jobs Act affects new modifications to divorce agreements signed before January 1, 2019. In particular, variations to the original agreement may alter the tax implications of alimony payments. Payments under your divorce agreement will be taxed according to the new rules, regardless of whether or not the payor is deductible.

Payments you make to your former spouse must meet all six of these criteria to qualify as alimony or separate maintenance:

The IRS defines alimony in this way, and it includes certain payments that are not eligible for alimony or separate maintenance treatment.

For tax purposes, if a person who pays alimony must also pay child support, but they do not complete both, the payments would go toward child support first.

Any property or income held by you and your spouse in one of the states listed below should be considered community property. Payments that represent your spouse's share of community property income are not considered alimony.

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Wisconsin
  • Washington
  • Texas

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Reporting alimony paid or received on your tax return if your divorce agreement is completed before January 1, 2019 is simple. You simply input alimony paid or received on Form 1040, Schedule 1.

  • If you're the person receiving alimony payments: You will enter the amount on line 2a. On line 2b, you must input the date of the original divorce or separation agreement. You're also required to give your Social Security number to the alimony payer, or you may face a $50 penalty.
  • If you're the person making alimony payments: You'll enter the amount paid on line 18a. Alimony payers are also required to input the recipient's Social Security number on line 18b, and the date of the original divorce or separation agreement on line 18c. If you do not include the recipient's Social Security number, you may be subject to a $50 penalty.

People who divorced on January 1, 2019 or after, do not need to include information about alimony payments in their federal income tax returns.

If you do have to declare alimony income on your tax return and neglect to include this information, you'll be subjected to the usual penalties and interest payments for underreporting your tax.

If you're going through a divorce, planning a divorce separation agreement may help you save money on taxes in the future. While alimony is no longer a deduction or income, other tax effects may impact your future tax returns.

Many factors play into whether or not a dependent is claimed on your tax return. For tax purposes, the custodial parent might not be the same person who has legal custody. The custodial parent for IRS purposes is the parent whose house the child sleeps at the most number of nights during a year.

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If a non-custodial parent meets the following four requirements, the dependent may be entitled to a claim in some situations:

  • The parents are:
    • Divorced or legally separated under a decree of divorce or separate maintenance
    • Separated under a written separation agreement
    • Living apart at all times during the final six months of the year
  • The child in question received over 50% of their support during the year from their parents
  • The child is in the custody of one or both parents for more than 50% of the year
  • The custodial parent signs Form 8332 declaring that they wont claim the child as a dependent for the year and the non-custodial parent attaches the written declaration to their return for divorces occurring after 1984
  • Divorced or legally separated under a decree of divorce or separate maintenance
  • Separated under a written separation agreement
  • Living apart at all times during the final six months of the year
  • Divorced or legally separated under a decree of divorce or separate maintenance
  • Separated under a written separation agreement
  • Living apart at all times during the final six months of the year

Even if a non-custodial parent can claim the dependent on their tax return, claiming the child will not confer any benefit on the non-custodial parent's tax advantages. Examples include:

  • Head of household filing status
  • Child and dependent care expenses credit
  • Earned Income Tax Credit
  • Health coverage tax credit
  • Exclusion for dependent care benefits

If you receive an asset in a divorce and want to sell it for a profit in the future, you'll have to pay the tax due on the whole appreciation amount, not just the amount of appreciation that has occurred since the divorce.

For this reason, it's important to select the assets you want in a divorce with care. For example, receiving cash from a bank account does not result in a gain or loss. However, accepting $75,000 of stock with a $25,000 basis implies you'd also be paying for a $50,000 gain that later would likely be taxed.

A $75,000 in cash alternative to the stock would be a more economical tax choice. Most divorce lawyers are aware of these tax implications. They will include them in their divorce settlements.

With TurboTax, we'll ask simple questions about your life and assist you in completing all the necessary tax forms. No matter how bad your situation, you can be assured that your taxes are done correctly.

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