Tax time is here again, and it serves as an important reminder to anyone considering divorce or negotiating settlement terms. The tax implications of alimony payments seem relatively simple on the surface: the payer can deduct the payments, and the recipient must report them as income. However, the Internal Revenue Service (IRS) considers a number of factors when determining payments that qualify as alimony.
Each Denville alimony attorney at our firm takes care to discuss tax issues with clients to help ensure they negotiate settlements that help them start new lives with the funds they expect to have.
Not All Payments Qualify as Alimony Under IRS Rules
As explained in Using IRS Topic 452 – Alimony Paid, the IRS has specific rules about the types of payments payers can and cannot deduct as alimony. Of course, child support payments cannot be deducted in this manner. Similarly, payments designated as part of the property settlement do not qualify. Additionally, write-offs are prohibited for certain other types of payments, including the following:
- Non-cash payments: For example, a spouse who is responsible for paying alimony might agree to a distribution of specific property to reduce the cash burden of alimony by a specified dollar value. This value cannot be deducted.
- Expenses related to payer property: The taxes related to solely-owned or jointly-owned property can quickly become very complex. While it is common practice to include money owed on joint property as part of an alimony payment, it does not typically qualify as alimony when the payer is the sole owner. For example, spouses who agree to permit their exes to live rent-free in a house most likely cannot write off a mortgage, property taxes or even home repair expenses. They may, however, be able to write off expenses incurred by their exes, such as utilities.
- Payments designated as non-alimony: It may be beneficial for both spouses to enter into an agreement that states that certain qualifying alimony payments will not be designated as such. As long as properly-executed documents can be produced at tax time, those payments are not considered to be taxable income to the recipient, nor can they be deducted by the payer.
- Voluntary payments: Any payments made above the amount specified in the alimony settlement portion of the final divorce decree cannot be claimed as alimony on tax filings, and the recipient does not have to report the payments as income.
Even the use of the wrong tax form can prevent alimony payers from writing off payments, so be sure to use the long Form 1040, as opposed to the1040A or 1040EZ.
Even Alimony Recipients Might Have Some Write-Offs
While alimony recipients must pay taxes on all cash-based alimony payments, they can often write off a portion of divorce-based tax-related expenses. One example would involve the expenses related to a divorce lawyer assisting with collection — as long as the lawyer lists these charges separately on the bill.
This is just one example of the many issues that alimony and other recurring post-divorce payments can have on taxes for either spouse. At Riordan & Associates, LLC, we take extra care to help ensure that our clients understand all financial details that contribute to their divorce settlements. Call us or use our convenient online contact form to gain the advice and support needed to help ensure a good start to life after divorce.