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The tax implications of alimony payments

By Louis DeNicola

Alimony payments – sometimes referred to as maintenance or spousal/partner support – might be required after a divorce, separate maintenance decree or written separation agreement.

The payments can help a spouse or former spouse maintain the lifestyle he or she grew accustomed to, or transition from marriage to separation.

Generally, the breadwinner or person who had a significantly higher income during the marriage – regardless of gender – will make payments to the other person.

Alimony is distinct from some other forms of payments in that an alimony payment could be a tax write-off, and receiving alimony could increase your taxable income.

What does and doesn't count as alimony?

Joshua Zimmelman, president of Westwood Tax and Consulting in Rockville Centre, New York, says that in order for payments to be considered alimony, they must be mandated by a judge. "Voluntary payments are not considered alimony," he says, adding that the payments must be made in cash, by check or by money order.

The following conditions must also be met for the payments to be considered alimony:

  • You can't file a joint tax return with your spouse or former spouse, and
  • Your spouse or former spouse received the payment made under a divorce or separation instrument, and
  • The payment isn't defined as not being an alimony payment by your divorce or separation agreement, and
  • The payments must not be required to continue after the receiving spouse dies, and
  • You can't live in the same household as your former spouse if you're legally separated when the payments are made (if you are legally separated under a decree of divorce or of separate maintenance).

Spouses or former spouses might make other types of payments to one another, but according to the IRS, the following payments aren’t alimony:

  • Child support.
  • The value of noncash property settlements, such as the value of a family vehicle that’s given to one spouse during a separation. 
  • Payments from “community property” income, which could occur if the couple lived in a community property state before separating. 
  • Payments, such as taxes or insurance, made to maintain the payer’s property.
  • Use of the payer’s property. For example, if the payer makes mortgage and insurance payments for a home the payer owns but where the non-payer lives, those mortgage and insurance payments are not considered alimony. 
  • Voluntary payments.

You and your spouse can also include a provision in your divorce or separation agreement to treat payments that would qualify as alimony as not alimony payments. As a result, they won't be tax deductible, nor will they need to be reported on the recipient's tax return.

If you pay alimony: How to report on your tax return

When you make alimony payments, there's no penalty if you don't report the payments to the IRS.

However, claiming a tax deduction on your federal tax return for alimony payments made throughout the year could lower your tax bill.

"It's not an itemized deduction," says JeFreda Brown, MBA and owner of financial consulting firm Goshen Business Group in Birmingham, Alabama. "It's an adjustment that is subtracted from your gross income to get to your adjusted gross income (AGI)."

In other words, you can claim the standard deduction (as most taxpayers do) and still get a deduction for paying alimony.

To report alimony payments, you'll need to file a return using Form 1040 — you can’t use Forms 1040A, 1040EZ or 1040NR. You'll list the total payment amount and the recipient's Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) on line 31.

"If you’re paying alimony to more than one spouse, a separate attachment with the amounts and Social Security numbers of each spouse must be included in the return," Brown says. "The total paid to all must be listed on line 31."

You may have to pay a $50 penalty, and the IRS might not approve the deduction if you don't list recipients' SSNs or ITINs.

If you receive alimony: How to report on your tax return

You must file using Form 1040, or Form 1040NR (for nonresident alien taxpayers), and attach Schedule NEC to report receiving alimony payments.

The alimony you receive will count as income for the year, and you'll report it on line 11 of Form 1040 or line 12 ("other") of Schedule NEC.

If your divorce or separation agreement states that the payments aren't considered alimony, you must attach a copy of the agreement to your tax return for each applicable year.

You may have to pay a $50 penalty if a spouse, or former spouse, who paid you alimony asks for your SSN or ITIN and you don't share it.

You may also be penalized if you received alimony and don't list the money under your income for the year. "The IRS will likely issue a notice to the receiving spouse indicating that income was omitted," Zimmelman says.

Underreporting income could result in underpaying your taxes, which can, in turn, lead to a failure-to-pay penalty.

The failure-to-pay penalty is generally 0.5 percent of the unpaid amount each month, with a maximum penalty equal to 25 percent of your unpaid taxes.

Plus, you may owe the IRS daily compounding interest (starting on the due date of your return) on the unpaid taxes.

The recapture rule

In some situations, the alimony recapture rule can force alimony payers to claim previously deductible payments as income if alimony payments decrease or end during the first three calendar years.

The recapture rule starts during the calendar year when the first alimony payment is made and covers the following two calendar years.

Under the recapture rule, the payer will have to include previous deductible payments as income in the third year if:

  • The payments made during the second and third years "decreased significantly" from the payments made during the first year, or
  • The payments made during the third year were at least $15,000 less than the payments made during the second year.

The recapture rule could apply if the payer wasn't able to provide the payments, the receiver didn't need as much support, the payer didn't make timely payments, or there was a change in the divorce or separation agreement.

There are a few situations in which a lower, or no, payment may not figure into calculation of whether the recapture rule otherwise applies:

  • The alimony payments were part of a temporary support order.
  • The payment amount is a fixed part of a payer's variable income from a business or property, or from compensation for employment or self-employment.
  • The receiver died or remarried.

As a receiver, if the recapture rule takes effect, you may be able to deduct your previous alimony income on the tax return you file the for the third year of alimony payments.

 

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

Disclaimer: We know taxes are complicated, so we provide this information for general educational purposes only. It isn’t intended to be personalized legal, financial or tax advice, and we don’t guarantee the accuracy, completeness or reliability of this content. If you have questions about your personal tax situation, consider contacting an accountant, tax attorney or financial advisor. Come back to Credit Karma Tax when you’re ready to file your taxes for free!

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