DEFINITION of Alimony Payment
An alimony payment is a periodic pre-determined sum awarded to a spouse or former spouse following a separation or divorce. Alimony is an obligation to make payments for support or maintenance; an alimony payment is the actual sum paid to fulfill the obligation. A decree or court order outlines the alimony payment structure and requirements.
BREAKING DOWN Alimony Payment
When a married couple becomes legally separated or divorced, a court may determine or the couple may agree to the legal obligation of one of the individuals to provide money to the other to provide the type of financial support to which he or she has become accustomed to throughout the life of the marriage. In the United States, the Internal Revenue Service permits alimony payments to be deductible by the payer, and requires the recipient to include the alimony payments as income. Child support payments are separate from alimony payments.
Changes In Alimony
The Tax Cuts and Jobs Act eliminates the tax deduction for alimony paid for divorce agreements executed after Dec. 31, 2018, although existing divorces and separations won't be affected by this. Under the new rules, alimony recipients will no longer owe federal tax on this support. These are big changes that will affect how many divorce decrees will be structured.
Instead of cash payments structured into divorce decrees starting in 2019, some advisers suggest the higher-earning partner award the spouse an IRA instead, which is in effect a tax deduction since no taxes had been paid on the amounts added to the account. The spouse who receives the account would have to pay taxes, though presumably at a lower rate. But the money can't ordinarily be taken out before age 59.5 without incurring a 10% penalty.
According to the IRS, a payment is alimony only if all the following requirements are met: The spouses don't file a joint return with each other; the payment is in cash (including checks or money orders); the payment is to or for a spouse or a former spouse made under a divorce or separation instrument; the divorce or separation instrument doesn't designate the payment as not alimony; the spouses aren't members of the same household when the payment is made (This requirement applies only if the spouses are legally separated under a decree of divorce or of separate maintenance.); there's no liability to make the payment (in cash or property) after the death of the recipient spouse; and the payment isn't treated as child support or a property settlement.