Is alimony taxable? Deductible?

Federal tax laws that went into effect in early 2019 changed the way alimony, or maintenance, is treated for tax purposes.

For decades, payers of alimony could claim the payments as a federal tax deduction, while recipients of alimony had to claim the payments as taxable income. That situation has been reversed for divorces finalized on or after Jan. 1, 2019.

Now, newly divorced payers cannot claim alimony as a tax deduction, and recipients of alimony are not required to claim the support as taxable income.

More to consider

The new rules would seem to favor alimony recipients over payers — but not always.

In addition to not having to pay taxes on alimony income, recipients could also find it easier to qualify for social programs that award benefits based on low income. Since the alimony recipient is not required to report alimony income for government benefits, the recipient could feasibly get a better subsidy.

However, the new rules could also affect alimony recipients’ ability to plan for retirement. Because alimony income is generally not taxed, recipients are not allowed to put that money into an individual retirement account (IRA).

Weighing alternative solutions

If you’re going through a divorce, it is important to take a close look at your current finances, as well as what your future financial situation could look like. Alimony is not part of every divorce, and there may be other ways to ensure a fair division of community property.

For example, some divorces involve a lump-sum payment or property division payments over time. If you’re thinking about selling the marital home, it may be a good idea to look into the possibility of a capital gains tax exclusion. If you have children, you may also be entitled to a child tax credit (CTC), which could figure into your overall calculations.