The Tax Cuts & Jobs Act of 2017 changed how alimony is taxable income or a deduction. And while people are still confused about the change, we've seen signals that the IRS is stepping up its enforcement relating to alimony-related tax. We're seeing a number of people receive a “Letter 692-M,” the letter the IRS sends specifically regarding alimony deduction.
If you've received a Letter 692-M, you—or ideally, a tax attorney—can explain to the IRS why your alimony was an allowable deduction. But before explaining it to the IRS, here are some issues worth noting.
A Pre/Post-2018 Dividing Line
The tax law ended the ability of tax payors to deduct alimony or spousal maintenance if they had finalized their divorces or legal separations after December 31, 2018. However, those who had completed their divorce or separation before that date are likely able to continue taking the deduction.
On the other hand, a taxpayer may lose the deduction if they had an earlier divorce but, after 2018, changed the payment terms or if the agreement specifically states that the payor cannot deduct the amount and the payee cannot include it as income.
What Is Alimony
For those who divorced before 2019, determining if someone is eligible for the deduction often comes down to whether or not the payments meet the legal definition of alimony. Simply handing over some money to a spouse does not suffice.
Instead, here are some of the requirements for payments to be considered alimony:
- The payments are required under a divorce or written separation agreement
- The former spouses must live in separate households when the payment is made
- The former spouses file separate tax returns
- The payments are made in cash
- If payments are made to a third party, there is a written document evidencing that this was made on behalf of the payee spouse
- The payments end upon the death of the payee spouse
Note that the cash requirement doesn't mean you handed a stack of dollar bills to your ex. It's that you gave them currency rather than another type of asset. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.