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They say that at least divorce is less expensive than the wedding. But that’s what some people would say, and others would disagree , especially when there are tax implications involved regarding the division of property, child custody decisions (who has the dependent on their tax return) and financial support, which includes alimony payments.
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Alimony, also named spousal support or spousal maintenance, is a payment to or for a spouse or former spouse under a divorce or separation instrument.
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While alimony laws differ from state to state, as well as the ways in which alimony is calculated or decided, as far as taxation is concerned, alimony is deductible by the payer and the recipient must include it in income, therefore the information below should be useful both for the payer and the recipient of the alimony.
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The term “divorce or separation instrument” mentioned above may refer either to a decree of divorce or separate maintenance or a written instrument incident to that decree, or to a written separation agreement, or to a decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement).
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To be considered alimony, a payment must meet certain requirements, specifically that:
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- You and your spouse or former spouse do not file a joint return with each other,
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- You pay in cash (including checks or money orders),
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- The payment is received by (or on behalf of) your spouse or former spouse,
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- The divorce or separate maintenance decree or written separation agreement does not say the payment is not alimony,
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- If 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,
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- You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse, and
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- Your payment is not treated as child support or a property settlement.
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Payments to a third party, meaning cash payments, checks, or money orders to a third party, on behalf of your spouse under the terms of your divorce or separation instrument can be considered alimony, if they otherwise qualify. These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc.), taxes, tuition, etc. The payments are treated as received by your spouse and then paid to the third party.
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| Life insurance premiums can also be regarded as alimony if you pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy. |
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| If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Your spouse must report one-half of the payments as alimony received. If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest. |
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If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. Your spouse must report one-half of these payments as alimony received. If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance.
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And here is what is not considered as alimony paid:
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- Child support (child support is never deductible);
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- Noncash property settlements;
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- Payments that are your spouse's part of community property income;
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- Payments to keep up the payer's property, or use of the payer's property;
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- Voluntary payments (which are payments not required by a divorce decree or separation instrument) do not qualify as alimony.
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| You can deduct alimony you paid whether or not you itemize deductions on your return. You must file Form 1040, but you cannot use Form 1040A or Form 1040EZ. |
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| Enter the amount of alimony you paid on Form 1040, line 31a and in the space provided on line 31b, enter your spouse's social security number (SSN) or individual taxpayer identification number (ITIN). If you pay alimony to more than one person, enter the SSN or ITIN of one of the recipients. Show the SSN or ITIN and the amount paid to each other recipient on an attached statement and enter your total payments on line 31a. If you do not provide your spouse's SSN or ITIN, you may have to pay a $50 penalty and your deduction may be disallowed. |
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Alimony received must be reported as income on Form 1040, line 11 or on Schedule NEC (Form 1040NR), line 12. You cannot use Form 1040A or Form 1040EZ. If you don’t provide the person who paid the alimony your SSN or ITIN, you may have to pay a $50 penalty.
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| If your alimony payments decrease or end during the first three calendar years, you may be subject to the recapture rule, which means that you have to include in income in the third year part of the alimony payments you previously deducted. Your spouse can deduct in the third year part of the alimony payments he or she previously included in income. |
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| You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. |
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| The reasons for the reduction may include a change in your divorce or separation instrument, a failure to make timely payments, a reduction in your ability to provide support, or a reduction in your spouse's support needs. |
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| If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”), cross out “received” and enter “recapture.” To deduct a recaptured amount, cross out “paid” and enter “recapture” on line 31a (“Alimony pid”). |
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| If you are a U.S. citizen or resident alien and you pay alimony to a nonresident alien spouse, you may have to withhold income tax at a rate of 30% on each payment. However, many tax treaties provide for an exemption from withholding for alimony payments. |
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As with any situation involving taxes and dealing with the IRS, it is our advice to enroll help from a tax professional who can knowingly navigate through the meanders of the ever so numerous tax rules and regulations.
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