Determining what is considered alimony and what is not is very important in a divorce tax situation.
Determining Alimony or Non-Deductible Payment in Divorce
Payments properly classified as alimony are deducted above the line on the payer’s return. For a payment to be classified as alimony and thus deductible by the payer and includable as income by the recipient, it must be made under a written divorce or separation instrument and meet all of the following requirements.
Guidelines on Determining Alimony for IRS:
- The payment must be in cash or cash equivalents.
- The payment is made to (or on behalf of) a spouse or former spouse.
- The payer’s obligation to make payments must be relieved upon the recipient’s death. (See Example 7G-6 and the caution following it.)
- When the payment is made, the payer and payee cannot be members of the same household and cannot file a joint return.
- The divorce or separation instrument does not designate the payment as not includable in gross income of the recipient and not allowable as a deduction to the payer.
- The payment cannot be explicit or disguised child support.
Alimony is taxable to the receiving spouse
Alimony is taxable to the receiving spouse and at the same time, the payor deducts the payment to compute adjusted gross income.. Alimony payments are treated as earned income to the recipient, potentially qualifying the recipient for an IRA contribution. This could also factor in to their eligibility for the earned income credit.
Lastly, to qualify as alimony for income tax, a payment must be made under a written agreement or decree; voluntary payments do not qualify. The agreement cannot expressly provide that the payment be treated as nonalimony.
You do not have to itemize deductions to deduct your alimony payments. You must claim the deduction on Form 1040. You cannot use Form 1040A, Form 1040EZ, or Form 1040NR. You must provide the social security number of the spouse or former spouse receiving the payments. If you don’t, you may have to pay a $50 penalty and your deduction may be disallowed.
Alimony, Divorce, and Taxes
For more information on the general requirements for alimony and for information on other decrees and agreements under which amounts paid and received may be treated as alimony see Publication 504, Divorced or Separated Individuals. For more information on decrees and agreements executed before 1985, see the 2004 version of Publication 504.