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How is alimony taxed?

When you hear the word “alimony” I’m willing to bet that you know, generally speaking, what that word means. In general, alimony refers to payments from one spouse to another after their divorce. More specifically, the payments would go from one ex-spouse to the other- given that their divorce has been finalized and they are no longer married. These payments can occur during the course of their divorce and often times continue after the divorce, as well. 

How alimony is treated as far as a taxable event depends upon whether or not the alimony payments qualify as meeting their definition of alimony. If the definition under the IRS rules are met, your alimony payments are tax deductible as the payor of the money. Your ex-spouse would have to pay taxes on the alimony received as ordinary income. At least, that WAS the rule for a long, long time. More on that in a moment. 

Depending upon the nature of your divorce case you may need to consult with a financial planner or another professional in that space to see how to best structure your divorce settlement. The downside to not structuring your settlement correctly is that you could end up having to pay taxes and penalties where you may not have needed to. 

The basics of alimony in Texas is that there are two types: spousal maintenance (which is ordered by a judge) and contractual alimony (which is decided up in divorce settlement negotiations). As I mentioned a moment ago, not all payments from you to your ex-spouse will actually count as alimony under IRS rules. 

Child support does not count as alimony- either during the divorce case or afterwards. Payments made out of your community estate division do not count as alimony either and are likewise not taxable. If you have agreed in your divorce settlement to pay money towards the upkeep of a home that is owned by you and your spouse then some of those payments may count as alimony depending on your specific circumstances. 

For instance, you are ordered to pay all of the mortgage payments on a home that was a part of your community estate, you may be able to deduct half of those payments as alimony on your taxes. You may even be able to deduct half of the interest payments on that mortgage if you itemize your deductions rather than choose the standard deduction. 

Changes to the laws on alimony and taxes can complicate matters some

If you and your spouse are going through a divorce then you need to be aware that the federal government has just made divorcing a little more complex as far as taxes are concerned. For nearly a century, the federal law regarding alimony payments stated that such payments are deductible from your income and are taxable as ordinary income for your ex-spouse who receives those payments. 

If you and your ex-spouse have a large gap in your incomes (if you earn a lot of money and she earns relatively little, for example) this is something that is agreeable for all the parties involved. Suppose that you are a doctor who earns $350,000 per year. This puts you in a higher income tax bracket as an individual than your spouse who works part time. When you all get divorced, in the event that you were ordered to pay spousal maintenance to your spouse, you would be able to deduct those payments from your income. Your ex-spouse would have to report that maintenance as income at a lower tax rate than you would have had to pay on the money had it been taxable at your tax rate. 

Therefore, the maintenance dollars are more valuable to your spouse they are for you- at least when we discuss this issue from a tax perspective. You would be smart to pay the maintenance as requested in this scenario because you have a small benefit to doing so (other than honoring the divorce agreement). Your ex-spouse benefits, you get to deduct the payments and the government doesn’t get the full benefit of your income. However, there have been changes set into motion in recent years that changes all of this. 

The times they are a changing- at least in regard to deducting alimony payments on your taxes

The alimony deduction has been somewhat controversial in the world of taxes. People that were not in favor of your ability to deduct these payments on your taxes argued that essentially the government was subsidizing alimony and maintenance payments for persons like yourself. After enough time of making those arguments, the government finally relented and as of the beginning of 2019 this deduction has been removed. 

Many people have made the argument that since the law had been in effect for so long that allowed you to deduct these alimony payments that it will create huge financial burdens for men and women like you. Divorcing households already are bearing a heavier burden as far as expenses since their formerly one household is now two. Couple that with a loss in overall household income and the financial implications of this change can be significant. 

Consider the situation with your children as well. Now that they are having to live in two houses instead of one, they may need extra school supplies, clothes or equipment for extracurricular activities. The purpose of alimony was to even the playing field as far as income is concerned after a divorce and more importantly to allow your ex-spouse to meet their minimal, basic needs. These twin goals are more difficult to accomplish now given the changes in the tax laws, some would argue. 

Can you change the amount of alimony that is to be paid in the future?

If you have an within your final decree of divorce that deals with spousal maintenance or contractual alimony and you alter that order through a modification of the decree, the tax ramifications just discussed will come into play. It doesn’t matter how old your final decree of divorce is. 

Modification of spousal support payments are governed by state law. You must meet certain criteria in order to qualify for this kind of modification. You are not justified to request a modification just because you want to be able to take advantage of the changes in the tax law. Like any other modification in Texas, you must allege and prove that a substantial change in circumstances has occurred for either you or your ex-spouse that has justified your motion to modify. 

For example, if you have suffered an injury or illness that disenables you from working and therefore paying the spousal support as ordered by the judge then you should specify this in your petition to modify the spousal maintenance award. Many times, a person in your position may file a petition to modify if he has lost his job and despite attempts to locate a job that pays similarly as well you have been unable to do so. A good faith effort must be shown. ‘

One thing that I will point out to you is that you cannot become underemployed or unemployed on purpose and then allege that you have grounds to modify the spousal maintenance award as a result. We family law attorneys see this occur in relation to child support. Unfortunately, mothers and fathers will sometimes quit well-paying jobs and take employment where they are paid considerably less in order to avoid paying a higher amount in child support. Now, I would call this cutting off your nose to spite your face, but people do think this way and attempt to present themselves in this fashion to judges. You would be wise not to do so. A judge will not be fooled, and neither will your ex-spouse’s attorney. 

How can all of this information be summed up?

If you were divorced prior to January 1, 2019 then the way that your alimony, spousal maintenance or spousal support payments are taxed will not change. If you have a divorce that was finalized before 2019 and you attempt to come back and modify that award in some way, you then open yourself up to submitting to the changes in the tax laws that we have spent some time discussing today. Finally, even if your divorce was filed in 2018 but is still pending to this day your divorce will be subject to the tax law changes. It doesn’t matter that you filed your divorce prior to January 1, 2019.

Consider this hypothetical example as it relates to spousal maintenance

Let’s assume that you and your spouse were married for twenty years before a divorce was filed. Your children are over the age of 18 and are no longer living with you at home. As in many houses, you have been working for the duration of your marriage and your spouse has been a stay at home wife and mother. She has never worked outside the home during your marriage. 

What can your spouse do now that you have filed for divorce? Is she going to be left up the creek with a paddle- financially speaking? Spousal maintenance or contractual alimony would act as a bridge for her to get from your married life to a financially viable existence as a single adult. There will understandably need to be some transition time for her as she attempts to gain her footing- finding a job, a place to live, learning how to live on a budget, etc. Spousal maintenance or contractual alimony will allow her to withstand some growing pains while staying afloat financially. 

The situation that your wife is in, as stated previously, is not unique. Many women either leave the workforce or never enter into it in order to raise a family. This is a great lifestyle for those women who choose to undertake this responsibility. However, in the event of divorce it can leave a spouse in this position very vulnerable. 

The spouse who is in your position, the wage earner/bread winner, not only consented to this arrangement, but benefited from it as well. It is nice to have a spouse at home raising the family and minding domestic matters from a peace of mind perspective. Being involved in a hectic work environment is much more tolerable when you know that your children and your home are well cared for in your absence. 

What to do in order to negotiate well in regard to spousal maintenance and contractual alimony

This is an important subject all the way around. If you are the spouse who needs the alimony to survive, you cannot negotiate poorly. Most divorces do not see the inside of a courtroom. This means that if you are to receive post-divorce financial support then it is likely that you will do so in the form of contractual alimony. Being able to negotiate well about this crucial subject could mean the difference between financial peace of mind and scrambling to survive.

On the other hand, if you are the spouse who will be paying spousal maintenance then you need to make sure that you are getting a fair deal. While there are limits to what a judge can order you to pay in maintenance, contractual alimony does not abide by those rules. To ensure that your spouse is not taking you to the cleaners you are well advised to have an experienced family law attorney by your side during negotiations. 

Questions about contractual alimony or divorce? Contact the Law Office of Bryan Fagan

If you have any questions about the material presented to you in today’s blog post please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultations six days a week here in our office. These consultations are a great opportunity for you to ask questions and receive direct feedback about your particular circumstances. Thank you for the opportunity to serve you and your family in the future. 

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