Oregon Tax Consultants Practice Exam

What is Alimony, and how is it treated for tax purposes?

1. Non-deductible by the payer and not included by the receiver

2. Unavailable for post-2018 agreements

3. Deductible by the payer and included in income by the receiver only for agreements before 2018

4. Tax-free to both parties, regardless of the agreement date

The correct answer is: Deductible by the payer and included in income by the receiver only for agreements before 2018

Alimony is a payment made from one spouse to another following a separation or divorce, designed to provide financial support to the lower-earning spouse. The tax treatment of alimony has changed under the Tax Cuts and Jobs Act (TCJA), which was enacted in December 2017. For agreements that were finalized before January 1, 2019, alimony payments are considered taxable income for the recipient and deductible for the payer. This means that the person receiving alimony must report it as income on their tax return, while the person making the payments can deduct the amount from their taxable income. Under the TCJA, for divorce or separation agreements executed on or after January 1, 2019, the new rules state that alimony payments are no longer deductible by the payer, nor are they included in the recipient’s gross income. This significant change means that the old rules regarding tax deductibility and inclusion of alimony income only apply to agreements made before the new law took effect. The explanation provided aligns with the correct answer, acknowledging the tax treatment of alimony based on the agreement date, specifically the distinction between pre-2019 agreements and those established afterward. It accurately reflects the current framework guiding tax consultants and individuals navigating these financial arrangements