What are the IRS guidelines for deducting alimony payments when legal separation and divorce occur in different years?
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The IRS guidelines for deducting alimony payments when legal separation and divorce occur in different years depend on the timing and terms of the legal instruments (separation agreement and divorce decree), the date of execution, and whether the payments meet the statutory requirements for alimony. The key considerations are as follows:
1. Definition of Alimony and Applicable Law
- Pre-2019 Agreements: For divorce or separation instruments executed on or before December 31, 2018, alimony payments are generally deductible by the payer and includible in the recipient’s income, provided all requirements of IRC §71(b) (as in effect before repeal) are met. This treatment continues for such instruments unless they are modified after 2018 and the modification expressly states the new law applies.
- Post-2018 Agreements: For instruments executed after December 31, 2018, or modified after that date with an express statement, alimony is not deductible by the payer and not includible in the recipient’s income.
2. Payments Made Under a Written Separation Agreement Before Divorce
- If spouses are legally separated under a written separation agreement (not a final divorce decree), and the agreement qualifies as a "divorce or separation instrument" under IRC §71(b)(2), payments made under that agreement can be treated as alimony if all requirements are met:
- The payment is in cash.
- The spouses do not file a joint return.
- The spouses are not members of the same household at the time of payment (if legally separated).
- There is no liability to make the payment after the recipient spouse’s death.
- The payment is not designated as non-alimony.
- The payment is not child support or a property settlement.
- Deductibility: If the separation agreement was executed before 2019 and not later modified to adopt the new law, the payer may deduct these payments, and the recipient must include them as income.
3. Payments Made After Divorce
- If the divorce decree is later issued and either incorporates or references the prior separation agreement, payments made after the divorce may continue to be treated as alimony, provided the requirements above are still met.
- If the divorce decree is silent or does not alter the terms of the separation agreement, the original agreement’s tax treatment generally continues.
4. Year of Deduction and Inclusion
- Cash Basis: Alimony is deductible by the payer and includible by the recipient in the year the payment is actually made and received.
5. Special Considerations
- Back Payments/Arrearages: If the payer makes up missed payments (arrearages) in a later year, those payments are deductible by the payer and includible by the recipient in the year paid/received, as long as the original obligation qualified as alimony.
- Community Property States: In community property states, if the payment is made from community income, special rules may apply. Payments that are the recipient spouse’s share of community income are not deductible as alimony by the payer.
6. Reporting Requirements
- The payer must report the recipient’s Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) on their tax return when claiming the deduction. Failure to do so may result in disallowance of the deduction and a penalty.
7. Example
Suppose a couple executes a written separation agreement in 2017 (pre-2019), and the divorce is finalized in 2019. Payments made under the 2017 agreement (before and after the divorce) are deductible by the payer and includible by the recipient, as long as the agreement is not modified after 2018 to adopt the new law and all other requirements are met.
8. Summary Table
In summary: Alimony payments made under a qualifying separation agreement before divorce are deductible by the payer and includible by the recipient if the agreement was executed before 2019 and not later modified to adopt the new law. This treatment continues after divorce if the payments continue under the same agreement. For agreements executed or modified after 2018, alimony is neither deductible nor includible.
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