Alimony and Separate Maintenance

The Tax Cuts and Jobs Act (TCJA) fundamentally changed how alimony is taxed. The key question on the EA exam is: When was the divorce or separation agreement executed?

Pre-2019 vs. Post-2018 Alimony Rules

For pre-2019 agreements, the payer deducts alimony on Schedule 1 (Form 1040) and must include the recipient's SSN. The recipient reports the income on Schedule 1.

Critical Exam Point: Child support is NEVER taxable to the recipient and NEVER deductible by the payer, regardless of when the agreement was executed.

Modification Rules

A pre-2019 agreement that is modified after December 31, 2018 will follow the new rules (non-taxable/non-deductible) only if the modification:

1. Changes the alimony or separate maintenance payment terms, AND
2. Expressly states that the TCJA repeal applies to the modification

Without both conditions met, the original pre-2019 treatment continues.

Alimony Recapture Rule (Pre-2019 Agreements Only)

The alimony recapture rule prevents front-loading of payments that are really property settlements disguised as alimony. It applies when alimony payments decrease by more than $15,000 between years during the first three calendar years.

If triggered, the payer must recapture (include in income) the excess alimony in Year 3, and the recipient can deduct the same amount in Year 3.

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Gambling Income

All gambling winnings are taxable income, whether from casinos, lotteries, horse racing, sports betting, or fantasy sports. This applies even if you do not receive a Form W-2G.

Form W-2G Reporting Thresholds (2024)

Gambling establishments issue Form W-2G when winnings meet these thresholds:

Where to report: Gambling winnings go on Schedule 1, Line 8b (Other Income).

Gambling Loss Deductions

You may deduct gambling losses, but with significant restrictions:

• Losses are deductible only if you itemize on Schedule A
• Losses are limited to the amount of winnings reported (you cannot create a net loss)
• You must keep detailed records (diary, tickets, statements)

Example: If you won $5,000 and lost $7,000 gambling, you report $5,000 in income and can deduct only $5,000 in losses (if itemizing). The extra $2,000 loss provides no tax benefit.

Professional Gamblers

If gambling is your trade or business, you report income and expenses on Schedule C. Professional gamblers can deduct:

• Gambling losses (still limited to winnings)
• Ordinary business expenses (travel, equipment, etc.)

To qualify as a professional gambler, gambling must be your primary income source, conducted regularly and continuously, with detailed records.

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Prizes and Awards

Prizes and awards are generally taxable at their fair market value (FMV) when received. This includes contest winnings, raffle prizes, and game show prizes.

Employee Achievement Awards Exception

A limited exclusion applies to tangible personal property awards for:

• Length of service (must have 5+ years of service; no similar award in prior 4 years)
• Safety achievement (not available to managers, administrators, or if >10% of employees already received safety awards)

Exclusion limits:

• Up to $400 for non-qualified plan awards
• Up to $1,600 for qualified plan awards

Cash, gift cards, and securities do NOT qualify for this exclusion.

Nobel Prize Exception

Nobel Prize winnings are excludable if the recipient assigns the prize to a qualified charity before receiving it.

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Jury Duty Pay

Jury duty pay is taxable income. Report it on Schedule 1 (Form 1040), Line 8h.

If your employer paid your regular salary during jury service and required you to remit the jury duty pay to them, you can deduct the amount remitted on Schedule 1, Line 24a as an adjustment to income. This effectively nets out the jury duty income.

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Hobby Income (IRC Section 183)

A hobby is an activity not engaged in for profit. Under TCJA (2018-2025), hobby income is taxable, but NO deductions are allowed against hobby income.

3-of-5 Year Profit Test

If an activity shows a profit in at least 3 of the last 5 years (2 of 7 years for horse activities), the IRS presumes it is a business, not a hobby. The taxpayer can elect to postpone this determination.

Nine Factors for Hobby vs. Business (Reg. 1.183-2)

The IRS uses nine factors to determine profit motive:

1. Manner of conducting the activity (businesslike records, separate accounts)
2. Expertise of taxpayer or advisors
3. Time and effort spent on the activity
4. Expectation that assets may appreciate
5. Success in similar activities
6. History of income or losses
7. Amount of occasional profits
8. Financial status of the taxpayer
9. Elements of personal pleasure or recreation

No single factor is determinative; all facts and circumstances are considered.

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Found Property (Treasure Trove)

Found property is taxable at FMV in the year it is reduced to undisputed possession. This includes cash found, buried treasure, or valuable items discovered.

Landmark case: In Cesarini v. United States (1969), a couple found $4,467 in old currency hidden in a used piano. The court ruled the treasure trove was taxable income in the year discovered.

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Bartering Income

When you exchange goods or services, you must report the FMV of what you received as income. If you agree in advance on the value, that value is generally accepted as FMV.

Barter exchanges issue Form 1099-B to report barter transactions. Report bartering income on:

• Schedule C if related to a trade or business
• Schedule 1, Line 8 (Other Income) if not business-related