7 Requirements for Alimony Payments to be Tax-Deductible

Alimony can be a contentious issue in any divorce case. Careful planning and negotiation is often required to come to an agreement that at least meets the lower-earning spouses needs, if not satisfy both spouses. But determining alimony is much more complex than just figuring out how much money the higher-earning spouse should provide to the lower-earning spouse.

Tax Implications Of Alimony

The tax implications of alimony are one of these complexities. This is an area that requires careful planning since the alimony payment and how it is provided directly impacts the tax burden of both spouses. In fact, if the alimony is planned right, both spouses may realize tax savings.

How? The IRS allows the paying spouse to deduct alimony payments as long as the receiving spouse reports the alimony as income. Since alimony usually results in shifting the income from a higher bracket to a lower one, both spouses may see tax savings. In fact, sometimes the payer can be persuaded to be more generous with their alimony payment amounts simply because of the tax savings.

Tax deductions for alimony aren’t automatic, though. Spouses need to make choices that ensure the payments are tax deductible. In some cases, it may be more favorable from a tax perspective for the payments to be non-deductible and non-taxable. It all depends on the couple’s current financial situation. Below, we’ve outlined 7 situations where alimony payments can be deducted so you can guide your clients through the decision-making process.

7 Requirements To Meet For Alimony Payments To Be Tax-Deductible

Like most tax situations, the IRS has rules that must be followed in order for alimony to be considered tax-deductible. Payments are considered alimony if:

  1.    Payments are not classified as property settlement or child support. Take care not to classify payments as child support or part of the property settlement. Neither is tax-deductible. If you want alimony to be deductible make sure it is in no way connected to the children or as part of your marital property.
  2.    Payments are made in cash (this includes checks or money orders). In-kind alimony is not tax-deductible so if you want to deduct alimony from taxes, make sure the payer makes payments by cash or check.
  3.    Payments are received by the current or former spouse and no one else. Not the kids, not a bill collector, not a mortgage company, for example.
  4.    The spouses do not file taxes jointly.
  5.    The agreed upon separation (legal separation or divorce) agreement does not say that the payment is not alimony.
  6.    Payments stop upon the recipient’s death. The settlement agreement or judgment must specify that alimony payments terminate when the recipient dies.
  7.    Spouses are not living with one another. Spouses must live physically separate in order for alimony payments to be tax deductible.

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