Are Texas Alimony Payments Taxable Income?
If you receive alimony payments in Texas, you may wonder whether those payments are considered taxable income by the IRS. Alimony, also referred to as spousal support, has typically been tax-deductible to the spouse paying the alimony and taxable as income to the recipient as long as the payments qualify as alimony by the IRS.
However, the tax laws have changed. If your divorce was finalized after December 31, 2018, the receiving spouse is not required to pay taxes on alimony. Conversely, those who pay alimony on a divorce finalized after December 31, 2018, can no longer deduct the payments from their taxes.
The IRS issued an additional explanation regarding separation and alimony payments that stated, “Beginning January 1, 2019, alimony or separate maintenance payments are not deductible from the income of the paying spouse, or includable as income for the receiving spouse for any divorce or separation agreement executed after December 31, 2018.”
Taxes, as they relate to divorce, require very specific knowledge regarding tax rules. Therefore, those paying or receiving alimony should consult a divorce attorney and tax specialist with knowledge in this area. Divorces that occurred before December 31, 2018, can continue using the old tax rules—unless they modify the terms of the alimony agreement. Once modifications have been made, alimony falls under the new tax rules.
Then the question arises as to what exactly qualifies as spousal support or alimony. Alimony in the state of Texas can either be considered contractual, meaning it is by an agreement between the spouses, or it is court-ordered, meaning the payments are not voluntary on the part of the paying spouse. First, you should know what is not considered alimony:
- Child support is never considered alimony; child support is not taxable income, while alimony often is
- The use of the paying spouse’s property is not considered alimony, nor are any payments to “keep up” the paying spouse’s property.
- Any non-cash property settlement
- Payments that are your spouse’s part of community income (See Publication 504)
Other forms of payment are much “fuzzier” when determining whether they qualify as alimony:
- Cash, checks, or money orders paid to a third party may be considered alimony under your divorce settlement agreement. In other words, if one spouse pays for the other’s medical expenses, tuition, rent, utilities, etc., and does so under the terms of the divorce agreement, then they may be considered alimony.
- If one spouse pays expenses for the marital home while the other spouse lives in the home (the home is jointly owned), at least a portion of the payments may be considered alimony. For example, if you are required to pay the mortgage payments on a jointly-owned home, you can deduct half of those payments as alimony, while the receiving spouse must consider one-half of the payments as income.
- When one spouse pays life insurance premiums to benefit his or her ex-spouse, these payments fall under the alimony “umbrella.”
Texas is considered unique regarding alimony in that there is a cap on alimony payments at the state level. That cap is currently set at $5,000 per month or at least 20 percent of the paying spouse’s gross monthly income. In some cases, “creative” divorce settlements determined during mediation can allow those receiving alimony to avoid having it taxed…so long as the IRS agrees.
Texas also decrees that marriages that last at least ten years but less than 20 are limited to 5 years of alimony. For longer marriages—those that have lasted at least 20 years but less than 30 are limited to 7 years of alimony. Marriages of a particularly long duration—longer than 30 years—are limited to 10 years of alimony. The new tax laws have potentially changed the amount of contractual alimony offered when one spouse is a high earner, and the other is considered a low earner.
There is likely to be a higher reliance on property division—giving more property to the lower-earning spouse instead of spousal support. It is then important that the lower-earning spouse has the skill set—or knows someone who does—to manage those assets. Unfortunately, when the lower-earning spouse receives property and the value drops significantly, the spouse receiving alimony has all the liability for that drop.
In other words, receiving spousal support is an asset that can be counted on not to drop in value, yet fewer higher-earning spouses want to pay alimony thanks to the tax changes. Whether you are receiving or paying alimony in Texas, you must speak to your Houston divorce lawyer regarding your tax liability.
Contact Our Houston Divorce Lawyers Today
Our Houston divorce attorneys can help you through the legal process of ending your marriage. Our lawyers will ensure you understand all financial repercussions from alimony, child support, and other marital payments.
At Roger G. Jain & Associates, P.C., we know that Houston couples deserve to have someone on their side that they can trust to handle all family matters swiftly.
Call us at (713) 981-0600 or fill out our confidential contact form to learn more about your legal options. Our Houston family law attorneys are available to help you protect your future and your family no matter what life brings.
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