A Primer on The Tax Treatment Alimony

Alimony is the money paid to a spouse or former spouse either under separation agreement or a divorce. Any payments not required by such a decree or agreement do not qualify as alimony. Most of the time, the purpose of the alimony payments are to support the recipient (the person who receives the money). Alimony is separate from property settlement amounts and child support payments.

General Tax Treatment

The general rule is that alimony received is taxable income. It should be reported on the tax return of the recipient, and it should be reported in the tax year it is received.

The other general rule is that alimony paid can be deducted from taxable income. Again, it should be reported on the tax return of the recipient, and it should be reported in the tax year it is received. You do not have to itemize deductions to claim your alimony payments.

Essentially, if the person who makes the payments can claim a tax deduction then they will be taxable on the person who receives the payments.

Tax Form Issues

You can only report alimony paid or received on Form 1040, and not Form 1040EZ or Form 1040A.

If you receive taxable alimony you must provide the person who pays the alimony with your full Social Security number, otherwise the IRS may charge a $50 penalty and their deduction may be disallowed.

Requirements for agreements made before 1985

There are different rules depending on whether the alimony agreement was last modified before 1985. This article is written about the tax treatment for alimony paid in relation to agreements that were made or modified after 1985. Details on the previous tax regime (which is still in force) can be found in publication 504 on the IRS website.

Requirements for making tax deductions

There are a number of requirements that need to be met before you can claim tax deductions for alimony paid:

• The payment is by cash, money order or check
• The recipient and the payer do not file a joint tax return
• When the payment is made the recipient and the payer do not belong to the same household
• The agreement to pay ceases at the death of the recipient. This applies to property as well as cash.
• The separation or divorce instrument does not state that the payment is not alimony (it does not need to state that it is alimony, just not claim otherwise)
• The payment is not treated as child support

Interaction with Child Support

Child support is never treated as deductible for tax. If a payment made in the year is not for the full amount agreed and it includes both alimony and child support elements, then the payment is allocated first to the non tax deductible child support for the payer. The recipient should also allocate this sum first to the non taxable child benefit.

Property Settlements

Property settlements will not qualify as alimony. This is the case even if it is required under a written agreement, including the divorce decree. This does not just apply to lump sums but also to payments made in instalments.

Changing Status in the Divorce Decree

It is possible to state in your divorce decree that alimony is neither taxable for the person who receives the alimony, or tax deductible for the person who pays the alimony. If it is not mentioned it will be assumed that the alimony will be taxable and deductible. You should take some independent tax advice before doing this.

Invalid decree

Even if the decree's validity is in question, payments under a divorce decree will be counted as alimony for tax purposes. The presumption is that a divorce decree, and so the status of the alimony payments, is valid for tax purposes until held invalid by a court.

Amended divorce decrees

The nature of any alimony payments may be changed by an amendment to the divorce decree. Amendments are rarely seen as retroactive for tax purposes. This is not the case if a retroactive amendment has been made to a divorce decree to correct a clerical error so that it reflects the original intent of the court.