For tax purposes, alimony is a payment to a spouse or former spouse under a divorce or separation agreement. It does not included voluntary payments outside the scope of the agreement. The payer may deduct alimony, and it is taxable income to the recipient.
There are nine requirements that must be met for the payments to be characterized as alimony:
Payments are required by a divorce or separation agreement
Payer and recipient do not file a joint return
Payment is in cash (check or money order)
Non-cash property settlements, community income, or upkeep or use of the payers property are not alimony
The agreement does not specify that it is not alimony
The individuals may not be members of the same household when the payments are made
Payments are not required after death of the recipient spouse
Payments are not treated as child support.
Payments are not related to a child contingency (until a child reaches 18 for example).
In addition, if there is excessive front-loading of the payments, a recapture provision is in place. This takes effect if the payments in the first year exceed the average payments in the second and third years by more than $15,000 and to the extent that the second year payments exceed the third year payments by that amount.
When an individual makes an alimony payment to an ex-spouse, it may be taken as a deduction on line 31 of the 1040. The payer is required to give the social security number of the recipient on this line, in addition to the amount of alimony paid.
Recently, however, the Treasury Inspector General for Tax Administration (TIGTA) has stated that there is an “alimony gap” of $2.3 billion per year. In other words, those paying the alimony are taking a deduction, but 47% of recipients are not reporting it as income. This is somewhat mind boggling as the IRS has the tools to match alimony deducted with alimony reported as income, but this matching process is apparently not taking place. In addition, TIGTA found that 6,500 returns taking an alimony deduction did not report the ex-spouse’s social security number. The deductions were apparently allowed.
Despite the laxity of the IRS in verifying alimony payments and deductions, the rules regarding alimony are rather strict. Related to the requirements for alimony, it should be noted that property settlements at the time of divorce are not alimony. Therefore they are not a deduction to the paying spouse and not income to the recipient spouse. Additionally, if the language regarding termination of payments at death is not unambiguous, the payments may not be held to be deductible or taxable, respectively.
The requirement that the payments must be made in cash do not prevent the payer from making payments on behalf of the recipient. For example, the payer spouse could make the mortgage payment directly to the lending institution and it would be counted as a valid alimony payment.
One should also be aware of creative wording that may try to characterize the payments as something other than alimony. Generally speaking, the IRS will look to the substance of the payments regardless of what they are called in the agreement. Advance payments of alimony do not give rise to a deduction for the individual making the payments.
It should also be noted that the couple cannot live together or file a joint return. Apparently, there have been pseudo-divorces coupled with an attempt to transfer income to the other spouse.
In short, when entering into a divorce or separation agreement don’t try to do it yourself. Get the advice of competent attorneys and CPA’s.
Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.
He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.
1 comment on “What you Need to Know About Alimony and Taxes”
Thanks for a nice review of the law, John. I would also remind people that if a non-US spouse is involved, the issues become even more complex and raise the spectre of US withholding tax on the alimony payments.
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