If you are going to be paying alimony as part of your divorce agreement, it's essential to understand how the Internal Revenue Service (IRS) views alimony and how you can make the most of the tax deduction you can receive for these payments.
Alimony payments are deductible for the payer and are considered taxable income for the recipient. It's essential that you both report the same amount of alimony on your tax returns. That amount should be spelled out in your divorce decree. Any inconsistency in ex-spouses' reporting can get the attention of the IRS and can trigger an audit.
If you are paying alimony, it's essential to understand the conditions under which the payments are deductible. For example:
- The ex-spouses must file their taxes separately.
- Payments must be made by cash or other cash-based method such as checks. Gifts, services and assets don't count.
- Payments must be received by your ex-spouse or by someone else whom it's been determined will receive them on your ex-spouse's behalf.
The divorce agreement must spell out the amount as alimony and not as some other type of settlement, including child support (which is not tax deductible).
The amount of alimony that each of you will be reporting to the IRS should be spelled out specifically in your divorce agreement. The recipient is required to provide the payer with his or her Social Security number for tax reporting purposes. Failure to do so will result in a fine.
Sometimes couples agree to a lump-sum alimony payment rather than regular payments over a given period. Some couples agree to something called a Section 682 Trust, which is also known as an Alimony and Maintenance Trust. That can have advantages and disadvantages for both parties that you should discuss with your attorney and financial and tax advisors.
As with all decisions made during your divorce, Rhode Island residents need to look at the long-term consequences and not just what will get the deal done the fastest for the most money up-front. Your legal and financial team can provide guidance and explain all of your options.
Source: Forbes, "Seven Key Things Women Need to Know About the Tax Implications of Alimony Payments," Jeff Landers, accessed Sep. 14, 2017