Information about Deducting Alimony on Tax Return
Divorced taxpayers are subject to several different sets of tax laws that will affect how certain payments made pursuant to a divorce decree are deducted. Very careful planning by the divorce attorney is needed to ensure that the proper alimony deductions will lead to the greatest tax benefit. Alimony is a payment to or for a spouse or former spouse made under a divorce or separation instrument.
Deducting Alimony Divorce Tax Rules Deductions
Alimony is deductible by the payor and includible in the income of the payee spouse or former spouse. Code Sections 71(a) and 215(a). References to “spouse” and “former spouse” may be used interchangeably. Alimony income and the alimony deduction are reported on IRS Form 1040 for federal income tax purposes. State laws should be checked (particularly those states with an “independent” income tax system that does not “piggyback” the Federal system) to determine if alimony is deductible by the payor and includible as income by the payee.
When are alimony payments deductible?
In tax terms, alimony payments are deductible only if they meet the requirements outlined by the IRS below. It is important to have your divorce decree or separation agreement reviewed for tax purposes before it becomes effective to make sure these requirements are met. Most divorce attorneys should understand how important tax planning is in divorce and set up legal documents to support deductible alimony payments. It is important to remember that even if the divorce decree states that a payment is considered alimony, it will not be deductible for tax purposes until it meets the specific IRS Alimony Requirements.
Here are the alimony requirements in a divorce decree in order to have alimony deductible for tax purposes:
- No voluntary payments: For an alimony payment to be deductible, it must be required by a divorce or support decree or a written separation agreement. it cannot be voluntarily given from one person to another. Failure to make a payment will be breaching the legal divorce contract.
- Payments to stop at death: For the payments to qualify as alimony for tax purposes, the payments must be required to stop when the spouse dies. Note: if the payments are to continue after the spouse dies, then none of the payments-including those made while the spouse is alive-are deductible as alimony for tax purposes.
- Cash only: Only payments of cash qualify as deductible alimony. The cash can be paid either directly to the spouse or can be paid on the spouse’s behalf under the terms of the instrument to cover an expense such as rent or the mortgage.Property given to one spouse to another will not qualify as deductible alimony payments under tax laws
- Separate living arrangements: If you’re making payments under a divorce decree, you must be living apart from your spouse for the payments to qualify as alimony. The IRS can check this by addresses on the tax return and during an IRS audit
- Child Support is Different: Payments made for child support are not deductible for tax purposes. This includes payments clearly fixed in the divorce decree as child support. It also includes, however, payments which the instrument calls alimony but which are linked to a contingency relating to the child. There are special rules that are meant to address this issue and the IRS will enforce this on audit.
Alimony vs. Child Support for Tax Purposes
Getting your spouse to agree to take alimony instead of child support can cut your taxes substantially. However, this might not be as easy as it sounds because the alimony is included in the spouse’s taxable income while the child support is not. Amounts will need to be grossed up in order to make sure that there is tax efficiency between the divorced couple.
In divorce negotiations this is a critical fact and can determine how much is paid in alimony and how much is paid in child support. There may be significant tax planning opportunities available to each parent depending on their income and job situation. A tax lawyer may be required to help plan for different contingencies. Getting proper planning now on alimony vs. child support for tax purposes will surely pay off in the future. The alimony recapture rule exists to prevent taxpayers from “disguising” otherwise nondeductible property settlement payments as alimony payments by attempting to “front-load” and deduct property settlement payments that are purportedly characterized as alimony.
Remember, if you are the recipient of alimony, you must report the full amount as income on your tax returns. Failing to report alimony is very likely to result in an IRS audit. Remember: Since the alimony paid is a tax deduction for the payor, the IRS can easily determine how much alimony you received.