The Seven Rules of Alimony and Taxes
In order to qualify as a tax deduction, spousal support payments must be made within certain guidelines.
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Alimony, also called spousal support or spousal maintenance, is the payment of money by one spouse to the other after separation or a divorce. Its purpose is to help the lower-earning spouse maintain the same standard of living after divorce.
If spouses follow certain rules, the IRS allows the paying spouse to deduct the alimony payments for tax reporting purposes. In turn, the recipient must report the alimony payments as income. In many cases, this results in a tax savings for both spouses—they are shifting income from a higher to a lower tax bracket by transferring alimony from the higher-earning spouse to the lower-earning one. The high earner saves money that would otherwise be paid to the IRS. The recipient’s tax bracket doesn’t usually change as a result of the alimony payments, and the payor is sometimes more generous because of the tax savings.
Example. If the higher earner has taxable income of $200,000 a year and pays the other spouse alimony of $80,000 a year, the higher earner will owe income tax on $120,000, not $200,000. The recipient might pay taxes of $16,000 on the $80,000. The payor saves more than that. The payor, who would have paid about $50,000 on $200,000 of income, now pays only about $24,000 on annual income of $120,000. Between the two, they are paying a total of $40,000, or $10,000 less, than the higher earner would have paid before deducting the alimony payments.
Most people want to make alimony tax deductible. You do, however, have a choice, and for some couples the tax consequences are more favorable if they make payments nondeductible and nontaxable because of the tax consequences. A tax expert can tell you which course is right for you.
(For more detail, please see our article, Is Alimony Always Tax Deductible to the Paying Spouse?)
Making Sure Payments are Tax-Deductible
However, not all alimony payments qualify as deductions. The IRS imposes seven requirements on taxpayers seeking to deduct alimony payments:
1. Make payments in cash or by check. You must pay alimony by cash or check for the benefit of a spouse or former spouse. The value of in-kind alimony—for example, giving your spouse your car—isn’t deductible.
2. Follow the documents and designate payments as tax-deductible. Make payments in accordance with a divorce document, such as a marital settlement agreement, separation agreement, court order, or divorce judgment. Payments made under to a temporary support order also qualify. (Section 71 of the Internal Revenue Code.) Just make sure your documents state the amount to be paid and describe it as alimony, spousal support, or spousal maintenance. The documents should also clearly label the payments as deductible by the payor spouse and taxable to the recipient spouse.
3. Don’t characterize payments as child support or a part of a property settlement. Child support payments, unlike alimony, are never tax deductible. So be sure that alimony payments are not tied in any way to support of your children. For example, if you agree that alimony will end when your child becomes an adult, you run the risk that the IRS will reclassify past alimony as nondeductible child support. Your past alimony deductions would be disallowed, and you would owe back taxes. Similarly, if a payment is seen as part of your division of marital property, it’s not tax deductible.
4. Specify that payments end at the recipient’s death. The marital settlement agreement or judgment must provide that alimony payments terminate when the recipient dies. (The document can also provide that the alimony obligation ends when the payor dies.) Most payors also have the right to terminate alimony if the recipient remarries.
5. Live apart. If you are still living with your spouse or former spouse, alimony payments are not tax deductible. Payments must be made after a physical separation.
6. Don’t file a joint tax return. If you and your spouse file a joint income tax return, you can’t deduct alimony payments.
7. Don’t pay extra up front. Make sure to follow IRS rules against front-loading—the advance payment of alimony that’s due later. Alimony should not be excessively high or front-loaded in the first three post-separation years. Excessive payments are subject to recapture or being taxed to the payor in the third post-separation year.
Claiming the Deduction
You can deduct the amount of alimony payments even if you don’t itemize deductions on your income tax return. Use the standard income tax return, IRS Form 1040, to claim the deduction. You can’t use the simpler Form 1040EZ or Form 1040A. You’ll need to provide your former spouse’s social security number.