by Jeff Landers, CDFA, Bedrock Divorce Advisors, LLC, * LTD Contributor
Seven Key Things Women Need to Know About the Tax Implications of Alimony Payments
Now, it’s time to specifically address the tax implications of alimony support payments.
Child support payments or property settlements (i.e., payments that do not qualify as alimony) are always non-deductible to the payor and non-taxable to the recipient. However, alimony is different, and both the payor and the recipient need to abide by the tax regulations that govern all alimony payments.
Here are a few key things to keep in mind:
1. The federal tax treatment of alimony is directed by the Internal Revenue Code, not by divorce agreements or court orders.
2. In general terms, alimony is typically taxable income for the recipient and a tax deduction for the payor.
3. First, let’s consider the situation if you are the payor of alimony. As outlined by the IRS in Topic 452 –Alimony Paid, alimony is a tax deduction for the payor, if:
- You and your spouse or former spouse do not file a joint return with each other.
- The payor pays in cash (including checks or money orders).
- The payment is received by (or on behalf of) your spouse or former spouse.
- The decree of divorce or separate maintenance (commonly referred to as a legal separation) does not say that the payment is not alimony.
- Legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment. In other words, you cannot live together after divorcing . . . and don’t think it’s “okay” if he simply starts sleeping in the maid’s quarters. According to the IRS, the home you formerly shared is considered one household, even if you physically separate yourselves in the home.
- You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse, and
- Your payment is not treated as child support or a property settlement.
4. If you are the recipient of alimony, you must report the full amount as income on your Form 1040 or Form 1040NR (PDF), Schedule NEC. Failing to report alimony on your tax return is very likely to result in an IRS audit. Remember: Since the alimony paid is a tax deduction for the payor, the IRS can easily determine how much alimony you received.
5. When filing taxes, the payor must enter the social security number of the recipient on Form 1040, line 31b. If you are the payer and you do not provide your ex-husband’s social security number, you may have to pay a $50 penalty and your deduction may be disallowed. If you’re the alimony recipient, you must give the payor your social security number. If you do not, you may have to pay a $50 penalty.
6. The timing of payments is critical. In order for payments to be considered alimony for income tax purposes, they must be made per a written separation agreement or a divorce decree issued by the court. Any payments made before this kind of divorce decree or written separation agreement cannot be considered alimony for income tax purposes.
7. There are alternatives to traditional alimony payments, and each alternative has its own specific tax implications. For example, since my firm exclusively represents women, it is our belief that an upfront lump sum payment in lieu of alimony is, in the vast majority of cases, the preferred option if the wife is to be the recipient of alimony. However, since the entire payment is made all at one time, an upfront lump sum payment requires careful, deliberate financial management. Also, since the lump sum, upfront payment is usually structured as part of the division of assets, it is not taxable to the recipient or tax deductible to the payor. Because your soon-to-be ex-husband will lose those tax deductions, he will rightfully want to discount the amount of the lump sum payment to be made (your divorce financial expert will be able to help you make those calculations).
In certain cases, yet another alternative, called an Alimony and Maintenance Trust (also known as a Section 682 Trust), is preferable to traditional, periodic alimony. Once again, the tax implications of an Alimony and Maintenance Trust differ depending on how the trust is structured.
Like so many other financial nuances of divorce, the tax implications of alimony (and alimony alternatives) can be rather complicated. But, don’t feel overwhelmed. Instead, start Thinking Financially, Not Emotionally®. A qualified divorce teamcan help ensure that you have the professional expertise and support required to receive a fair settlement, keep your finances intact and secure your financial future.
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Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC (http://www.BedrockDivorce.com), a national divorce financial strategy firm that exclusively works with women, who are going through, or might be going through, a financially complicated divorce. He also advises women business owners on what steps they can take now to “divorce-proof” their business in the event of a future divorce. He can be reached at Landers@BedrockDivorce.com.
All articles/blog posts are for informational purposes only, and do not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.
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