How are alimony and child support payments taxed?
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Child support payments are neither deductible nor income to the recipient.
Before the 2017 Tax Cuts and Jobs Act, alimony (spousal support) payments were usually structured by the parties to produce either of two tax results:
(1) deductible by the payer ex-spouse and gross income to the recipient ex-spouse, or
(2) not deductible by the payer and not taxable income to the recipient (tax neutral).
The above treatment continues to be applied for divorce or settlement agreements finalized before 2019. However, for new divorce agreements signed beginning on January 1, 2019, the law changes: (1) the deduction for alimony (spousal support) payments is abolished, and (2) the recipient no longer has to include those payments in taxable income.
The 2017 Tax Cuts and Jobs Act fundamentally changed the tax treatment of alimony payments, beginning in 2019. The following is an explanation of the rules in effect until the end of 2018.
In settling a divorce, the parties frequently plan on whichever tax result works out best. If the payments are not structured to comply with the rules, the general rule is that alimony payments are income to the recipient and deductible by the payer.
Frequently, divorcing couples agree upon a fixed aggregate payment from one spouse to the other. Even if the recipient spouse dies before the payments are due, this sum will be payable, and it will be treated as a property settlement. A property settlement is not deductible by the transferor and is not income to the transferee. Even if the payments are properly structured, the Internal Revenue Code prevents deduction of "front-loaded" payments.
The tax consequences of payments to be made because of the dissolution of a marriage are complicated, and divorcing couples would be well advised to take them into account in agreeing on the economic issues involved in divorce.