How to Report Dowry Payments on Your Taxes

Tax Rules for Alimony Before 2019

The tax rules for reporting alimony payments you made or received depend on the date of your divorce. If you were divorced in 2019 or later, alimony does not affect your taxes. Payments you make are not tax-deductible, and alimony income is not considered taxable.

However, most taxpayers who divorced before 2019 can deduct the alimony payments they make and must report the alimony they receive as taxable income.

The Tax Cuts and Jobs Act (TCJA) eliminated the tax deduction for alimony from the tax code from 2019 to 2025 for most divorce agreements and decrees issued during that period. Taxpayers can still claim the deduction and must report payments for most divorces completed before December 31, 2018.

Reporting Alimony Received as Income

Enter the total amount of any alimony received on line 2a of Schedule 1 with your Form 1040 to report alimony you received as income if you were divorced before 2019. Alimony includes payments sometimes referred to as “separate maintenance.” This is income you receive when you are legally separated but have not yet technically divorced.

Alimony does not include the following:

• Non-cash alimony
• Non-cash property settlements
• Payments that are a portion of your spouse’s income from joint property
• Use of property paid for or payments for maintenance of property
• Voluntary payments that are not required by court or agreement

The total from Part I “Other Income” of Schedule 1 flows to line 8 of Form 1040.

Claiming Alimony Paid as a Deduction

If you were divorced before 2019, report the total amount you paid on line 19a of Schedule 1, then transfer the total from this section “Adjustments to Income” to line 10 of Form 1040. Schedule 1 also asks for your ex-spouse’s Social Security number, along with the date of your divorce decree or agreement, to ensure you are entitled to claim the deduction.

Providing your ex-spouse’s Social Security number allows the IRS to know who received the money so the agency can verify that the individual reported it as income.

You do not have to itemize the alimony tax deduction to claim it. You can claim it and itemize other deductions, or you can claim the alimony tax deduction and take the standard deduction instead.

Requirements to Deduct Alimony Payments

You can deduct alimony from your taxable income if your divorce was finalized before 2019, as long as you meet the following requirements and rules:

• The alimony must be paid in cash, including checks or money orders. If you provided property or assets instead of alimony, they are not tax-deductible. The IRS considers that a property settlement.
• Your divorce decree or separate maintenance order or written divorce agreement must not specify that the payment is anything other than alimony. The document must clearly state it is alimony or separate maintenance, not child support or part of a property settlement, as those do not qualify as alimony.
• You and your ex-spouse cannot live in the same household while making the payments. You have no obligation to continue payments after your ex-spouse’s death. This must also be clearly stated in your divorce decree or separate maintenance agreement.

Alimony Recapture Rule

The IRS established an alimony recapture rule to prevent divorced spouses from disguising property settlement payments as alimony to take advantage of tax benefits of alimony. Property settlements are often finalized within the first three years after divorce. Even if this wasn’t your intent, the rule may apply.

Generally,

Generally, the IRS penalizes the payee of alimony if alimony payments decrease significantly in the three years following separation or divorce. Your payments cannot drop by $15,000 or more in the third year compared to the second year, and the payments in the last two years cannot drop “significantly” compared to the payment in the first year.

The IRS reserves the right to “recapture” your deductions if it determines that the payments you made do not meet the criteria for alimony. This means that the amount you deducted as alimony must be added back to your income in future tax years, at which point it becomes taxable.

Example of the Alimony Recapture Rule

Suppose a woman pays her ex-husband $20,000 as alimony in the first year after their divorce, but she only pays him $2,000 in the following year. She claims the deduction for the payments each year. This raises suspicion that the first payment may actually be a means of sharing marital assets, but still provides the woman with a tax benefit.

According to the recapture rule, the $20,000 that was deducted could be converted into $20,000 of additional taxable income for the woman in the third year. The $20,000 that the ex-husband should report as taxable income could also be claimed as a deduction in the third year.

Several circumstances could trigger this rule. For legitimate reasons, your payment amounts could drop significantly from the first to the second year of divorce or cease entirely within three years of the divorce. The reason could also be that payments stop as soon as the youngest child leaves the nest. The IRS will review your situation to determine whether the payments were indeed defined as alimony.

The IRS provides exceptions for circumstances beyond your control, such as if the alimony amount was modified downward by the court due to an unforeseen financial crisis.

Frequently Asked Questions

What is alimony?

Alimony is the support paid to an ex-spouse as part of a separation or divorce order. It helps support the spouse who earns significantly less than the other spouse during the marriage (or does not earn any income at all). It typically ends if the spouse receiving alimony remarries or if the court orders it to stop.

Is child support considered income?

Child support is not considered income for tax purposes. It is also not considered income when determining eligibility for medical assistance (Medicaid). However, child support is considered income when applying for the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps.

Source: https://www.thebalancemoney.com/alimony-and-taxes-3193082