Who Pays Taxes on Alimony (Spousal Support) in Indiana?

• How does alimony work in Indiana?
• Rehabilitative spousal maintenance in Indiana
• Are there different types of alimony?
• How tax law surrounding spousal support changed
• Are alimony payments considered taxable income in Indiana?
• References

Technically speaking, Indiana doesn’t have alimony; the term isn’t used in its laws. Practically speaking, it has a system of spousal maintenance that many would colloquially call alimony. Spousal maintenance shares many similarities to the types of payments known as alimony in other states.

Spousal maintenance in Indiana is comparatively limited to similar systems of support available in other states. It is typically short-term and designed to help a divorced person support themselves and pay for any training or education they need to get a suitable job and start supporting themselves. 

How does alimony work in Indiana?

Indiana law doesn’t contain language allowing for alimony, but it does permit similar spousal maintenance payments. These payments are often ordered temporarily, although permanent payments may be ordered if certain conditions are met.

A judge may order spousal maintenance payments to be made if a person meets these criteria:

• They are physically or mentally incapacitated.
• They have custody of a child who is physically or mentally incapacitated.
• They need rehabilitative maintenance.

Rehabilitative spousal maintenance in Indiana

Rehabilitative maintenance is the most common type of spousal maintenance ordered in Indiana. A judge determines a person’s need for maintenance based on their education level and earning capacity. They may also look at whether that person's education or training was interrupted to take care of children and/or the home.

The idea of rehabilitative maintenance is that one party may have made sacrifices in their career or education to help support their family. Now that they are divorcing, rehabilitative maintenance payments will help them advance their education so they can find outside work.

This type of maintenance payment was once tax deductible for the person making the payment. Furthermore, the person receiving the payments had to report the money received as taxable income. However, this is increasingly not the case.

Are there other types of alimony?

Again, the term alimony doesn’t apply when discussing Indiana tax law, but spousal maintenance exists under Indiana law and can be awarded in different ways. 

Much of how this type of payment is ordered (or not ordered) is up to the court. The judge presiding over the case will try to determine if either party needs maintenance payments and whether the other party can afford to pay them. The focus is usually on short-term support; rehabilitative maintenance lasts a maximum of three years under the law.

The goal is to help the disadvantaged person cover their basic needs and expenses and the cost of education or training. While this is a goal in many states, the short-term nature of Indiana maintenance is relatively unique. Most state laws at least have the potential to award maintenance for significantly longer periods than in Indiana, and they do so fairly often. 

How tax law surrounding spousal support changed

The tax laws surrounding spousal maintenance in the U.S. recently changed.

Informally called the Tax Cuts and Jobs Act (TCJA) of 2017, U.S. Congress passed a major overhaul to the Revenue Code of 1986, which altered how alimony and similar payments are taxed. The TCJA also changed many other elements of the tax code. Some of these changes may be controversial, but it’s important to understand the tax laws that affect you to avoid legal or financial difficulty. 

Relevant to the TCJA is when your divorce was finalized. This is because the TCJA grandfathers in divorces under the old rules if they were finalized before January 1, 2019. If your divorce (or a similar separation instrument) was finalized after this date, the new rules apply. 

As time goes by, an increasing number of divorces fall past the January 1, 2019 cutoff. As such, for older divorces, alimony will generally continue to be taxed similarly to how it was under the old rules. This holds true even if the divorce (or separation instrument) is modified in the future, unless the modification expressly states an adoption of the new rules.

Are alimony payments considered taxable income in Indiana?

Under the old rules, if you received spousal maintenance payments in Indiana, they generally qualified as taxable income. You had to pay taxes on the money you received.

Similarly, if you paid spousal maintenance in Indiana, it generally qualified as tax deductible. You were able to deduct this money from your taxes if you paid it.

The older system favored the payer. The new system benefits the receiver.

Whereas the old system favored the payer of alimony, the new system favors the receiver. The recipient of spousal maintenance in Indiana gets money with no additional tax burden, while the payer pays money but gains no tax benefits.

References