Posted by KLSM CPA Firm PLLC

Basic Rules of Taxes & Alimony

Basic Rules of Taxes & Alimony

Alimony, also known as spousal maintenance or support, is the payment that one partner makes to the other after divorce. The idea is to help low-earning individuals take care of expenses and maintain the same living standard after divorce.

 

Can you deduct tax Alimony? 

While you can deduct alimony, it only applies to you if your divorce was finalized before January 2019. The 2017 TCJA made significant changes to the tax law that altered spousal support for both parties.

 

The date of divorce is Important. 

For divorce finalized before Jan 2019, it is essential for the spouse who pays the support to report such payment as a deduction, while the receiving party needs to report and pay tax on such alimony. 

For couples with a pending divorce after Jan 2019, Uncle Sam will not treat it as income for the recipient spouse, and the paying spouse will not have to deduct the alimony amount paid each year.

 

Income Reporting and Tax Deduction Submission for Spouse Support Orders 

Provided spouses can follow some rules; Uncle Sam gives the paying spouse alimony deduction for tax reporting purposes. The recipient also needs to report such alimony payment as an income. This translates to tax savings for both parties, as revenue is translated from a higher to a lower tax bracket since funds move from the spouse earning higher to the lower-earning spouse. The higher-earning spouse saves money that would have gone to Uncle Sam.

Many people want to have tax-deductible alimony. There is, however, a choice, and some couples will experience a pretty favourable tax consequence provided they make payments non taxable and non-deductible due to such tax consequences.

 

How to Ensure you have a tax-Deductible Payment 

All alimony payments do not qualify as deductions. Here are several requirements Uncle Sam imposes on taxpayers who want to deduct their alimony payments."

  1. Have Cash or Check payments 

All your alimony payments to your spouse (or former spouse) must either be by cash or check. You cannot deduct the value of alimony paid in kind like a house.

  1. Note the Documents and Specify Payments as Tax-deductible

Ensure your payments follow a divorce document like separation agreement, divorce judgment, court order, etc. All payments made using a temporary support order are also eligible. However, the document must state the payment amount and describe it as spousal support, alimony or spousal maintenance. Also, such a document needs to classify the payment as deductible by the paying spouse and taxable by the recipient.

  1. Do Not Classify Payment as Part of Property Settlement or Child Support

You cannot deduct child support payments which makes it essential to ensure that alimony payments are not linked to the support of your kids in any way. For instance, if the agreement is that alimony ceases when your child grows to be an adult, there is a possibility that Uncle Sam will classify all previous alimony funds as child support that are nondeductible. Uncle Sam disallows all previous alimony deductions, and you have back taxes to deal with. 

  1. Make it Known to the Recipient that Death Terminates Payment 

One’s marital settlement judgment needs to specify that alimony payment ends on the death of the recipient. Such documents also need to make sure that alimony obligation seizes on the death of the paying party. Also, most paying parties reserve the right to terminate payment when the recipient remarries.

  1. Live Apart 

People still living with their spouse or former spouse will have their alimony payment nondeductible. Your payment must be after physical separation for it to qualify as tax-deductible. 

  1. Avoid Filing a Joint Tax Return

For people who file a joint income tax return with their spouse, deduction of alimony payment is impossible. 

  1. Ensure you don’t pay Extra

Be sure to follow IRS rules that bar front loading – paying alimony due later in advance. Such payments need not be too high, especially in the first three years after separation. Such excessive payments run the risk of being taxed to the payor in the third year after separation.

 

Claiming Deduction 

One can deduct the alimony payment even if there is no itemized deduction on the tax return. You can claim this deduction using the standard income tax return like Form 1040, while form 1040EZ and 1040AZ cannot be used. Also, one needs to supply the social security number of the former spouse.


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