“A” is for alimony. I hope you live happily ever after with your first spouse, but statistics suggest divorces do happen about half the time. When there is a divorce there is often alimony as part of the divorce decree. A divorce decree often has several items with tax implications depending on the family situation. It’s important that you understand those tax implications before you sign the divorce decree.
Alimony is a fixed sum of money paid from one spouse to the other spouse. If it is defined as alimony in the divorce decree, it is ordinary taxable income for the spouse that receives the alimony. Since it’s income for one spouse, the spouse paying the alimony gets an above-the-line tax deduction. If it’s not defined as alimony or spousal maintenance in the divorce decree, then it’s probably going to be child support. Obviously having children is the key to having child support. The lower income spouse receiving the payments will want them to be child support with no income tax to pay, so the two parties have inverse desires to classify payments as child support or alimony which is why the resulting compromise is often some of each.
Any property settlements or lump sum payments as result of the divorce are going to have no tax consequences. The other thing that will have some tax consequence is claiming the kids. The divorce decree will indicate which spouse can claim the children as dependents, which can make numerous differences on their tax return. If the noncustodial parent is going to claim a child as a dependent, the custodial parent will need to complete Form 8332, and the divorce decree might make that form part of the requirements of the custodial spouse. Read More