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What Are the Tax Implications of Paying or Receiving Alimony?

by
Spencer Wilson
on
4/12/2016
What Are the Tax Implications of Paying or Receiving Alimony?

If you have recently gone through a divorce, then the word “alimony” may have become part of your lexicon, either because you are on the paying end or the receiving end. Whichever side of the equation you are on, alimony can have tax repercussions, and it is important that you have a thorough understanding of the way that these payments need to be addressed.

The tax rules regarding alimony have evolved over the years, and as a result the topic needs to be broken down into two different, completely separate categories based upon the time that the associated separation or divorce decrees were put into place. The first category pertains to agreements executed prior to 1985 and the second category is for those that are more current. All of the information that we will provide regarding taxation and alimony in this article should be understood to apply strictly to agreements signed after 1984.

There are specific requirements that need to be understood regarding alimony. These include the following: 

  • It is required that alimony payments be paid to either a spouse, ex-spouse, or a third party acting on their behalf by their spouse or ex-spouse. The payments that are defined as alimony are specifically those provided after a divorce decree or separation agreement has been executed or finalized. Payments made prior to the execution of the agreement do not apply.
  • There must be a decree, agreement, or contract of some kind that specifically defines the payments that are to be made. This is true regardless of whether the alimony payment is part of a divorce, a separation, or a support order.
  • Alimony is not child support, and no child support payment is to be in any way construed as an alimony payment. Child support is treated entirely differently, and is never interpreted to be any kind of income. It is also not an expense that can be deducted by the person making the payment.
  • If the spouses – or ex-spouses – continue living at the same address, then payments provided or received cannot be interpreted as alimony. There are no exceptions to this rule: spouses or ex-spouses residing separately from one another but still within the same household are not to consider payments made or received as alimony.
  • Alimony payments must stop being remitted once the person slated as recipient dies.
  • In order to prevent child support from being deducted by the payer as alimony payment, there must never be any contingency based upon a child’s status placed upon its payment.

The reason that the U.S. tax laws establish so many requirements regarding alimony is that it is considered income for the person who receives it and is a deductible expense for the person who is required to make the payments.  This is true unless the separation agreement or divorce decree specifically indicates otherwise. It is permissible for an agreement to specifically stipulate that payments are not to generate a taxable event for either the payer or the recipient.

The tax issues regarding alimony can be complex, and need to be taken into consideration when going through a divorce. Other issues that need to be taken into consideration include:

  • Discrepancies between the amount that a payer reports as an expense and the recipient reports as income will be noted by the IRS as a result of a specific feature of their computer system. This is a direct result of the fact that many taxpayers have incorrectly reported – either overstating or understating — the amount that they have paid or received. When the numbers between parties do not match up, the IRS will undertake an audit of both parties.
  • The person who is responsible for making alimony payments must have knowledge of the recipient’s Social Security number, as it is required that they include this information when listing alimony payments on their tax return.
  • The government considers child support paramount in relation to alimony, so if a person who is required to pay both fails to provide the full amount defined by the divorce decree or separation agreement, the payments are first applied to the amount owed for child support. Only what remains is counted as alimony, and that is true for both taking a deduction as an expense and for the recipient reporting alimony income.
  • If you are receiving alimony payments from a spouse or an ex-spouse, it is important to remember that no income tax withholding has been applied to these payments. It may be in your interest to discuss making estimated tax payments with a qualified tax professional.

 Alimony payments constitute a taxable event for both the person making the payments and the person who is receiving them. It is a good idea to seek professional guidance to make sure that you are reporting the payment or receipt appropriately.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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