Almost every divorce will involve a discussion about alimony, or spousal support as it is called in some states. Whether you will be receiving payments or making payments there four basic rules about alimony you need to know BEFORE you finalize your divorce.
Alimony Is Governed By State Laws
While the tax treatment of alimony is determined by the Internal Revenue Service, your obligation or right to alimony is governed by your state. The interpretation of state laws could also differ depending on the specific jurisdiction in which you. Often times what becomes the final agreement between two people differs significantly from what the law would provide. That’s a good thing because it means it’s being customized to the specific situation. You could for example agree to an upfront lump sum payment rather than a monthly payment. You might agree to payments of a lesser amount each month but for a longer period. You might agree to a certain amount for a specified number of months to begin with and then reduce that to a lower amount for the remainder of the term.
But you can’t customize your agreement until you understand the laws for where you are and what they mean for you in terms of dollar amounts. That usually means consulting with a local family law attorney such as the Scottsdale divorce attorneys at The Canterbury Law Group and the sooner you do this in your negotiations, the better.
Tax Treatment of Alimony
Alimony is tax deductible to the payor and taxable to the recipient. This is easy to remember if you think of it in terms of reducing income for one person and providing income for another.
In contrast, child support is neither tax deductible nor taxable as income. This is because the IRS treats child support as a sharing of incurred expenses by the parents. Married parents don’t get to deduct these expenses so why should divorced parents?
The tax treatment of alimony may create opposing interests for you and your spouse. For example, if you are going to be paying to alimony, then you might try to negotiate that the amount that you would also be paying for child support, which is not tax-deductible remember, should be lumped together and treated as alimony. Your STBX would likely find this unattractive since it would increase the amount of alimony and thus increase the income to them potentially resulting in higher taxes.
Claiming The Tax Deduction
If you are going to be paying alimony then it’s advisable to have your separation agreement clearly state the terms of your payment detailing when payments start, when they end and the amount. Once your divorce is final, this will become a court order and you can use this to support your deduction with IRS.
When you file your taxes you will need to state the amount of payments made to your former spouse and you will need to provide their social security number. If you don’t provide their social security number there may have to pay a $50 penalty and your deduction may be disallowed.
If you and your ex are communicating well, then it might be worth confirming with them the amount of the deduction you’re claiming.
Reporting Alimony As Income
As a recipient of alimony, you are required to report the payments on your tax return and you are required to provide your social security number to your ex. Since the alimony does increase your taxable income you’ll want to take this into consideration when you are calculating withholding for your employer otherwise you’ll have to pay the taxes due at the time of filing.
Since your ex will have reported the alimony payments to you on their tax return with your social security number, the IRS will be looking to ensure that the data on your return matches their return. Keeping accurate records of the payments made to you will be essential in reconciling your numbers with your ex’s and could save you potential complications with the IRS and no one likes to deal with those.
There are probably few more contentious issues in a divorce than alimony and whether you are receiving it or paying it, the key is to approach this as a business negotiation. That starts with gaining an accurate understanding of what the law provides in your jurisdiction.
For more information on the general requirements for alimony and for information on other decrees and agreements under which amounts paid and received may be treated as alimony, see Publication 504, Divorced or Separated Individuals.
This is a sponsored post from the Canterbury Law Group.