How is alimony typically reported on tax returns?

Alimony is treated as unearned income for tax purposes. When an individual receives alimony, it is required to be reported as income on their tax return. This applies to divorce or separation agreements that were executed before the changes to the tax code in 2019, under which new rules were established regarding alimony for agreements finalized after December 31, 2018. In those prior arrangements, the payer can deduct the alimony payments, while the recipient must report it as taxable income.

Unearned income generally refers to income that is not earned through employment or a business venture but is received instead as a transfer payment or financial assistance. Alimony fits this definition, making it part of the unearned income category.

Understanding the classification of alimony as unearned income is crucial, as it affects how the tax obligation is calculated for both the payer and the recipient. This knowledge helps individuals ensure compliance with tax reporting requirements and understand potential tax ramifications related to alimony payments.