Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
Generally, alimony is tax deductible by the person paying, and taxable to the person receiving.
When a house is split, many times the same amount of income now has to support two houses. By paying deductible alimony, the payor spouse is able to stretch income by lowering taxes; and the receiving spouse can come out ahead by receiving various tax benefits that would not have been available without the taxable alimony.
Even though your hair stylist and your co-workers say it’s so because their friend who lives next to the guy who says his brother actually went through it, there is a better source. The Internal Revenue Service. And when the IRS speaks, you need to listen. Why? Because not all payments qualify as an alimony deduction. In fact, there are actually seven requirements for the deduction:
- Payments must be made by check or in cash to or for the benefit of your former spouse. If it states specifically in your divorce agreement, you can make payments to a third party on behalf of your spouse.
- Payments must be made in accordance with the divorce document. (This does not include voluntary payments that are not made under a divorce or separation instrument.) That document would be the marital settlement agreement, a written separation agreement, court order, or divorce judgment. Therefore, payments made under a temporary order are considered to be alimony.
- Be very clear in the divorce document by stating which payments are to be deductible by the payor and taxable to the recipient. If it is not very clear, the IRS will not decide in your favor.
- Payments must be made after physical separation. In other words, live apart. (Yes, there is an exception.)
- It must be stated that payments will stop upon the death of the recipient. (And yes, the IRS does have agents ‘down there’ to monitor your spouse, just in case.) Other conditions might be that payments terminate upon the remarriage of the recipient, or death of the payor.
- Child support is not deductible. If your alimony is adjusted due to an event in your child’s life, past payments may be reclassified as nondeductible child support. Be specific in the divorce agreement.
- The IRS will recompute your deduction if your alimony payments are very high in the beginning, and then decrease or terminate during the first three calendar years. This can happen if you change your divorce agreement, fail to make timely payments, are unable to continue support, or if your spouse’s needs are reduced.
The question I receive the most is: “Are any legal fees or court costs for the divorce deductible?” Yes, you may be able to deduct legal fees paid for tax advice. In addition, you can deduct payments to appraisers, actuaries, and accountants for services in determining your correct tax or in helping to get alimony.
Did you know that required medical payments for your spouse may be considered alimony? Also, a portion of your required mortgage payment.
- Write into the agreement who will claim the dependency exemption of the child[ren]. Under current tax law, the custodial parent gets all the children, regardless of the amount of child support paid.
- Keep a record of all payments, received or paid, including date and amount.
My advice is:
- Before your divorce, see your tax preparer and discuss the tax consequences.
- During your divorce, review the divorce documents with your tax preparer.
- After your divorce, see your tax preparer and discuss your taxes.
Remember, every question you have is very important: Write it down, and call your advisors, not your hair stylist or co-worker.
For more information, check out IRS Publication 504 [PDF].
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.