How is alimony classified for tax purposes?

How is alimony classified for tax purposes?

• A. As part of earned income
• B. As uearned ordinary income
• C. As capital gains
• D. As tax-exempt income

Answer: (B)

Alimony is classified as unearned ordinary income for tax purposes. When a person receives alimony payments, those payments are taxable income to the recipient and must be reported on their tax return. This classification applies to divorce agreements made prior to the Tax Cuts and Jobs Act of 2017; for agreements made after December 31, 2018, alimony is no longer deductible for the payer or taxable for the recipient. The rationale for classifying alimony as unearned ordinary income is that it does not come from active participation in a trade or business. Instead, it represents a transfer of income that the receiver is entitled to based on a legal obligation established during divorce proceedings. This classification ensures that alimony is treated similarly to other forms of income and subjected to income tax, maintaining the integrity of the tax system and promoting equity among different types of income sources.

Alimony is classified as unearned ordinary income for tax purposes. When a person receives alimony payments, those payments are taxable income to the recipient and must be reported on their tax return. This classification applies to divorce agreements made prior to the Tax Cuts and Jobs Act of 2017; for agreements made after December 31, 2018, alimony is no longer deductible for the payer or taxable for the recipient.

The rationale for classifying alimony as unearned ordinary income is that it does not come from active participation in a trade or business. Instead, it represents a transfer of income that the receiver is entitled to based on a legal obligation established during divorce proceedings. This classification ensures that alimony is treated similarly to other forms of income and subjected to income tax, maintaining the integrity of the tax system and promoting equity among different types of income sources.