Tax Treatment of Alimony- Top 10 Things You Should Know

  1. Alimony is taxable to the Recipient and Deductible by the Payor. Essentially this means that the person receiving alimony needs to declare the money as income on their federal and state tax returns. The Payor can deduct the income from their overall gross income. You will need your ex-spouse’s social security number to take this deduction on your 1040.
  2. Alimony Payments Must be Made in Cash. This requirement is intended to stop parties who attempt to use alimony as a property settlement. These payments usually take the form of check or direct deposit to the recipient spouse, but can also include payments made to third parties for the benefit of the recipient, like rent or a mortgage payment.
  3. Must be Made Pursuant to a Court Order. For the purposes of tax treatment of alimony the IRS only recognizes alimony payments made pursuant to a court order. This includes payments made pursuant to a temporary order, but be careful where payments are being made on a voluntary basis because you may not be entitled to deduct from your gross income.
  4. Termination of Alimony. The termination of the alimony payments cannot happen within six (6) months of a major event in the lives the children. The IRS doesn’t want you trying to deduct child support from your gross income. So make sure alimony does not end within six (6) months of the emancipation of any of the children of the marriage. If for some reason your alimony does terminate within the six (6) months it may cause the IRS to credit those alimony payments to you as income and you could end up owing the IRS money.
  5. Must be Living in Separate Housing. The Payor and the recipient of alimony payments cannot reside in the same household or payments will not count as alimony, and cannot be deducted from the Payor’s gross income. The courts have allowed a reasonable amount of time for the Payor to move out of the marital home.
  6. Recapture. Recapture is a method of recapturing excess alimony payments. The IRS looks at the first three years of your alimony payments and if the payments decrease each year by a certain amount you may have a recapture issue. The IRS wants to ensure that a payments made in the first three years are not actually property division, but being called alimony. This problem can be avoided if alimony payments stay the same over the initial three
    (3) year period.
  7. Terminates at Death of Payee. Alimony only exists where someone needs support. If the recipient were to pass then that person would obviously no longer need financial support. However, if there is a past due balance owed to the recipient then that person’s estate can sue to collect past due amounts.
  8.  Separate Tax Returns. The Payor and the Recipient may not file joint tax returns and also claim alimony as a deduction. If you were married and received alimony during the same year you would file as Married Filing Separately.
  9. Joint Tax Returns. If the parties file joint tax returns they are not entitled to claim the alimony deduction, but you may receive a more beneficial tax treatment if you file jointly. The reason for this is that the standard deduction is higher, as well as the earned income credit, and the dependent care credit. As a couple you can also take higher loss deductions.
  10. Overall Lesson. You should always consider the tax consequences of any decision you make regarding property division, alimony or child support. Don’t be afraid to run the numbers a bunch of different ways before making a decision. The piece you should not lose sight of in the divorce process is that now two households have to exist on the old income, and many times that is not an easy task. By exploring different tax implications you might be able to save yourself and your ex-spouse some money that can be allocated towards actually needs instead of payments to the IRS. For more information check out the IRS 504 Publication (2011) For Divorced or Separated Individuals.