 and welcome to the session in which we will discuss the taxability of alimony and child support. The tax treatment of alimony depends on the date on which the divorce agreement was executed. What does that mean? Well, we have a cutoff date and any divorce agreement executed on or before December 31st 2018. Any payment made will be deductible by the payor. So if you're paying, you'll be able to deduct the payment and the recipient of the alimony, the amount is taxable to them. Now, the Tax Cuts and Jobs Act of 2017 introduced some changes to the tax treatment of alimony and basically it simplified it. Any divorce agreement executed after December 31st 2018, simply put, starting 2019 are neither deductible by the payor. So if you pay, it's not deductible nor taxable by the recipient. So it's very important to look at the date and determine whether the agreement was executed before December 31st 2018 on or before. If that's the case, well, guess what? The payor can deduct it and the recipient is taxable for the recipient. After that date, it becomes a mute. It doesn't matter. The person that's paying cannot deduct. The person that's receiving, it's not taxable to them. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. Assuming you have a divorce agreement before and you received alimony, alimony received is reported on schedule one with other income then you add up all of your income and let's assume you included, you know, $10,000 of alimony and your other income total to $15,000. The $15,000 is transferred to line eight. Now, this is like a form 1040. This is what it looks like for the person that's paying, they can deduct. So notice here on page two, page two of schedule one, of schedule one, there's adjustment to income. The person that's paying will be able to report the $10,000. So remember, the person cannot be paying and receiving, but this is assuming the payor and the payee to different individuals and they have to report their social security. Again, that's assuming the agreement was executed before December 31st, 2018. Now, what is considered alimony? So it's very important to know the definition. A payment may qualify as alimony provided that it's made in cash. It has to be cash. It cannot be property or anything else pursuant to a divorce agreement or other separation instrument. The agreement does not explicitly specify that it's not alimony. So if it explicitly specify that's not alimony, then it's not alimony. The payor and the recipient are not a member of the same household because if you're living together, there's no separation here. Also, the payment is made to a spouse with whom the taxpayer cannot be filing a joint return. So you cannot be filing a joint return and one person is the payee and the other person is the payor. And the payor, the person that's paying, does not have any liability once the other individual, the recipient passes away. Well, this is the definition of alimony and they may ask you which of the following will not qualify as the part of the definition. Now, in case of divorce, sometime you might have property settlement, basically the husband and the spouse, they liquidate and they might split things up, the home, stocks, bonds, so on and so forth. The property settlement represent the transfer of property to a former spouse following a divorce agreement between the two spouses. The transferor should not recognize any gain or loss on the transfer of the property. In addition, the transferor's basis is carried over to the transfery. So basically the basis of the transferor is carried based on the transfery. Now, before 2019, before the change to the tax law, whenever the IRS believed one spouse was making alimony payment through property settlement, remember, property settlement is not a taxable event and this is what people used to do. They used to basically what they called front loading of alimony payment. Give you more in property settlement because it's not taxable. Then the alimony was recaptured into the gross income of the recipient and allowed a deduction from the payor's gross income. That's no longer the case. After 2019, and now anything after 2022, that's no longer an issue because alimony payment are no longer taxable or deductible. So that's alimony. How about child support agreement? Because in a divorce, you have alimony payment and you have child support payment. Easy. Child support payment, let's just define them first. Are payments made to satisfy the legal obligation to support the taxpayer's child? Regardless of the execution date, it does not matter. And that's always been the case. Of the divorce agreement, child support payment are neither taxable nor deductible. So basically, it's, you know, if you see child support, you ignore it's not deductible for the person that's paying and the person that's receiving that's not that's not taxable to them. It does not matter when the agreement was executed. Divorce agreement does not explicitly state the amount to be paid for a child support. Any payment would be suspended or stopped after the occurrence of a future event such as the child reaching the age of majority or the marriage of the child that it will be treated as a child support. On the other hand, when the divorce agreement determines separate payment for alimony and child support and the spouse only make a partial payment, the payment is first allocated to the child support and the remaining amount of any is considered alimony. Let's take a look at an example. Mary and Ryan divorce agreement was executed in 2016. Well, it means it's relevant because the amount paid is deductible. The amount received is taxable. As per the agreement, Mary is entitled to receive an annual payment of 45,000 out of which 25 is allocated to child support in 2020. Mary received a total amount of 40,000. Determine the amount that Mary should include in her taxable income for 2020. Well, guess what? The payment is 45. The taxpayer only made a 40,000 dollar payment. How do you allocate the payment? First, we have to satisfy the child support. So the child support is neither taxable to the recipient nor deductible by the payer assuming anything. Now the child support portion is neither the taxable to the recipient nor deductible by the payer. It doesn't matter what time. However, the alimony payment is since it's executed in 2016 is deductible by the payer and taxable to the recipient. In this question, the spouse made a partial payment. What should we do first of the 40,000? We would assume we are satisfying the child support first and what's left is 15,000. Therefore 15,000 is alimony and 15,000 is deductible by the payer and taxable by the recipient. This is how it's going to work. What should you do now? 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