Financial assistance in the form of alimony is often ordered to be paid by one former spouse to the other during or after a divorce or legal separation in order to address the financial disparity that may exist between the parties when they split.
Alimony payments have tax implications for both the payor and the recipient, and both the parties need to comply with federal tax regulations that govern alimony payments.
Alimony payments are tax deductible
Alimony is typically treated as tax deductible for the person paying it, and as taxable income to the person receiving it. This means that the payor may be able to deduct their alimony payments from their income taxes. The recipient, on the other hand, must report the alimony they received as taxable income on their federal tax returns.
What payments are considered alimony for tax purposes?
There are several requirements that must be met in order for any payment you make to your former spouse to be considered alimony and therefore deductible for federal tax purposes. The four basic requirements are as follows:
- The spouses cannot file a joint tax return for the year in question
- The spouses must have lived in separate residences at the time the payments were made
- The payments must have been ordered in a divorce decree or separation agreement, or some other court order that requires you to make alimony payments to your former spouse
- The payments must be made in cash or a cash equivalent, such as a check or money order.
In addition, payments to 3rd parties, such as attorney’s fees and medical expenses, may also be considered alimony and tax deductible. But, only if the receiving spouse has submitted a written request specifying that this is how he or she would like to be paid.
Alimony deductions may also include payments made on a life insurance policy owned by an ex-spouse if the divorce decree or settlement agreement mandates this type of payment be made.
What payments are not considered alimony?
Some types of payments made to a former spouse during or after a divorce or legal separation are not considered deductible for federal tax purposes. These include:
- Child support or anything having to do with child support or raising your children.
- Non-cash payments – payment in the form of services rendered or real property will not qualify.
- Payments that are designated as non-alimony payments in your divorce decree or settlement agreement. You and your spouse may in your divorce decree or separation agreement agree to render your alimony payments as nondeductible. This may be beneficial if the payor does not need the tax deduction and the recipient does not want to report the income, perhaps because he or she doesn’t want the added tax burden.
Contact an experienced family law attorney
The tax implication of alimony payments can be complicated. For more detailed information regarding taxes and alimony, consult with an experienced family law attorney who can ensure that your divorce or settlement agreement successfully addresses the tax implication of alimony, whether you are the payor or the recipient.