Individuals must consider the tax consequences of obligations related to spousal support or maintenance, also known as alimony, in divorce proceedings. Many soon to be ex-spouses often fail to realize that there are tax consequences for these types of payments, which may cause further economic hardship and even emotional stress.
Spousal support typically refers to the money a legally married spouse pays to the other spouse while they are still married. Spousal support may last as long as the marriage continues. Spousal maintenance consists of payments an ex-spouse pays to his or her ex-spouse after the dissolution of the marriage. The amount and duration of spousal maintenance are defined in the divorce decree. Some states refer to spousal maintenance as alimony. It often is used as a generic term to describe both types of support and will be used as such in this blog.
Alimony is deductible by the payor, while included in the income of the payee spouse. Alimony paid pursuant to a divorce or separation decree may be deducted despite the fact that deductions are not itemized, provided the payments qualify as alimony for federal tax purposes. One of the main requirements is that the payments must be required by a divorce decree or agreement of the parties, otherwise, they do not qualify as alimony. Voluntary payments which are not made pursuant to a divorce or separation decree are not deductible for federal income tax purposes.
In order to be considered alimony, a payment must meet certain specific requirements. There is no requirement that alimony payments must be fixed, for a specific amount, or periodic. There is also no requirement that the payments constitute support of a spouse. The requirements that must be met are as follows:
- The payment is made in cash. R.C. § 71(b)(1); I.R.C. § 215(b).
- The payment must be received by or on behalf of a spouse pursuant to a “qualifying instrument”, namely a divorce decree, decree of separate maintenance, or a written separation agreement. R.C. § 71(b)(1)(A), (b)(2).
- The parties do not designate that the payment is not alimony. This means that the divorce or separation agreement does not designate the payment as nondeductible by the payor or excludable from the payee’s income. R.C. § 71(b)(1)(B) allows the parties to affirmatively agree that an otherwise qualifying payment is not alimony or separate maintenance, and therefore not deductible by the payor or included in income by the payee. A court may order that alimony payments are nondeductible and nontaxable.
- The divorced or legally separated spouses must reside in separate households when the payment is made. R.C. § 71(b)(1)(C).
- The payor must not be liable for any payments during the period after the death of the payee spouse, and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse. R.C. § 71(b)(1)(D).
- The parties must file separate income tax returns. R.C. § 71(e). Alimony payments will not be recognized if the payor and payee file a joint return.
- The payment must not be for child support.
Alimony received from a spouse or former spouse is taxable in the year that it is received. Alimony income and the alimony deduction are reported on IRS Form 1040. Alimony is not a miscellaneous itemized deduction, but an above-the-line deduction, and therefore deductible regardless of whether or not the payor itemizes deductions.
Because alimony is considered earned income by the Tax Code, a recipient ex-spouse may individually create an IRA and make contributions from the amount of alimony received. Another consideration is that it may be necessary to make estimated payments or increase the tax withheld from wages during the year to avoid penalties since alimony is not subject to withholding tax.
It is of the utmost importance when facing these tax-related issues and concerns to consider the assistance of an experienced tax attorney, especially in sensitive dissolution matters. If you live in the New York or the Tri-State area and are facing any of the questions or scenarios presented above, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
