Tax Issues Facing Federal Employees Who Divorce — Part 2: Alimony, Child Support and Tax Carryforwards (2024)

Under the Tax Cuts and Jobs Act of 2017 (TCJA), alimony paid with respect to divorce or separation agreements and executed after Dec. 31, 2018 is not deductible by the payer and is not taxable income to the payee. This means that there are no tax consequences for alimony arrangements established after Dec. 31, 2018.

Alimony payments will continue to have tax consequences if payments are made with respect to a divorce or separation agreement executed before Jan. 1, 2019. These alimony rules for pre-2019 divorce decrees now discussed.

Alimony Rules for Pre-2019 Divorce Decrees

Alimony is a payment to, or for, a former spouse under a divorce or separation instrument. Generally, an individual can deduct the alimony or separate maintenance payments he or she is required to make to a former spouse, or to a third party on behalf of that former spouse under a divorce or separation instrument (such as a divorce decree) if certain conditions are met.

Cash payments, checks or money orders made to a third party on behalf of a former spouse under the terms of a divorce or separation instrument can be alimony, if they otherwise qualify. For example, payments for a former spouse’s medical expenses, housing costs (rent, utilities), taxes or tuition will qualify as alimony. The payments are treated as received by the former spouse and then paid to the third party.

The following items are not considered alimony: (1) child support; (2) noncash property settlements; (3) payments that are the spouse’s part of community income; (4) payments to keep up the payer’s property; (5) use of property; and (6) voluntary payments.

The alimony payer can deduct (as an adjustment to income) the alimony paid. In other words, the alimony payer does not have to itemize on a tax return in order to deduct the alimony paid. The recipient spouse must report alimony as income on Form 1040.

Note the following: (1) the alimony payer spouse must provide the Social Security number of the recipient spouse on the payer’s tax return. If the recipient’s spouse’s Social Security number is not included, the alimony payer may have to pay a $50 penalty and the deduction may be disallowed. If the payer spouse paid alimony to more than one former spouse, then the Social Security number or IRS individual taxpayer identification number (ITIN) of each recipient former spouse must be provided on an attached statement. The total payments are shown on the tax return; and (2) taxable alimony can be treated as compensation to the recipient former spouse when determining IRA contribution and deduction limits for the former spouse.

Child Support

A payment that is specifically designated as child support or treated as specifically designated as child support under a divorce or separation instrument is not alimony. Child support is never tax deductible by the payer and is not taxable income to the payee. If a divorce decree or other written instrument or agreement calls for alimony and child support, and the payer spouse pays less than the total required, then the payments apply first to child support. Any remaining amount is then considered alimony.

Child support payments may vary over time. Payments could be reduced on the happening of a contingency such as employment, death, leaving the household, leaving school, getting married or reaching a specified age or income level, relating to the child.

Tax Carryforwards

Since it is generally tax advantageous, most married couples file as married filing jointly. However, following a divorce the two former spouses must each file his or her tax return as unmarried (filing as single or head of household) or, if a former spouse remarries, file joint returns with new spouses. The final joint tax return of a divorcing couple may contain some types of tax carryforwards. The following are the more important tax carryforwards:

• Capital loss carryforward. Capital loss carryforwards must be allocated upon the separate capital gains and losses of the spouses.

• Charitable contribution carryforwards. Charitable contribution carryforwards are apportioned between the spouses in the ratio of what separate carryforwards would have been if the former spouses filed separate returns for the year of the excess charitable contributions. It should be noted that under the Tax Cuts and Jobs Act of 2017 (TCJA), charitable contributions in any one year cannot exceed 60 percent of one’s adjusted gross income (AGI) with any excess contributions carried forward to the following year.

• Net operating loss (NOL) carryforwards. Net carryforwards are apportioned between the spouses in the ratio of what separate NOL carryforwards would have been with each spouse separately computing income and deductions.

• Suspended Passive Activity Losses (PALS). The IRS states in its staff training materials that transfers incident to divorce should be treated as “gifts” with the suspended PALs of the “donor” former spouse added to the basic passing to the “receiving” former spouse.

• Estimated tax payments. Joint estimated tax payments made before a divorce are finalized and may be allocated between the spouses in any matter agreeable to both. If the parties fail to reach an agreement, then the estimated tax payments are allocated in proportion to each spouse’s separate tax liability. Then each spouse claims estimated tax paid times the tax shown on each spouse’s separate return for the year divided by the total of the tax shown on both spouses’ separate returns.

Costs of Getting a Divorce

Since a divorce is a personal undertaking, legal fees and court costs associated with getting a divorce are not tax deductible. The costs of personal advice, counseling, or legal action in a divorce are not tax deductible, even if they are paid in part to arrive at a financial settlement or to protect income-producing property.

Before 2018, legal fees paid for tax advice paid in connection with a divorce or for obtaining alimony were deductible as miscellaneous itemized deductions, subject to the two percent of adjusted gross income limit. Following the passage of TCJA, miscellaneous itemized deductions are not allowed, effective Jan. 1, 2018. This means that effective Jan. 1, 2018 any legal fees paid for tax advice in connection with a divorce or for obtaining alimony are no longer deductible.