The tax reform caused a lot of confusion for people filing for divorce and including spousal support in the settlement. Now that a few years have passed, divorcees still have questions about how to account for spousal support payments.
Ultimately, accounting professionals remain the best persons to ask these questions. Even so, there are general rules to keep in mind.
The taxable threshold
The tax reform created a clear line for divorcees regarding when the income provided to spouses became taxable and for whom. According to the Credit Karma, divorces finalized before 2019 allow payers to deduct alimony from taxable income while payees included the amount in taxable income.
For divorces finalized after 2018, payers now pay taxes on the alimony and payees do not treat it as taxable income. Some settlement modifications after 2018 might also need to follow the post-2018 tax ruling.
Not all money provided to ex-spouses count as alimony or spousal maintenance. The IRS excluded the following payments from spousal support payment calculations:
• Payments that form part of community property settlements
• Payments related to use or upkeep up of a payer’s own property
• Voluntary payments
• Non-cash settlements
• Child support
This change puts additional pressure on breadwinners because the alimony payments push them back into a higher tax bracket. Some people say this was a strategic decision by the federal government to ensure taxation at higher rates. The new tax treatment of spousal support also makes it more difficult for dependent spouses to negotiate fair terms because breadwinners face heavier economic loss. This might lead to more friction during divorce proceedings for some years to come.