The government levies tax on alimony payments. Alimony counted as an income for the spouse who is receiving the amount. If you are a spouse sending the alimony, then you will not be liable to pay the taxes on behalf of your partner. If both the spouses follow specific rules, then the one paying alimony must formally state it as alimony payment, and the receiver must report the alimony payment as his/her income.
As per IRS guidelines, amounts paid under separate maintenance or divorce on written separation agreements or decrees entered into by both the spouses are considered alimony for federal tax under the following conditions: If
- the joint return is not filed by you and your spouse with each other.
- The payment is made in cash, including money orders or checks.
- separated legally abiding by the decree of separate maintenance or divorce, when you make the payment, you and your former spouse are not the members of the same household.
- payment made is for the maintenance of your spouse or former spouse.
- the separate maintenance or divorce decree or written separation agreement fails to state that the payment is not alimony.
- the payment is not used for property settlement or child support.
You have no obligation to make payment in the form of property or cash after your spouse’s or former spouse’s death.
Following payments are not considered as alimony under separation instrument or divorce:
- Payments for the use of the payer’s property.
- Child support.
- Payments are done to keep up the property of the payer.
- Payments that become part of your spouse’s community property income.
- Non-Cash settlements of property.
If your divorce decree or separation maintenance agreement provides for child support alimony, then you pay lesser than the total needed, but payments first apply for child support, and the rest amount is noted as alimony. Child support is, thus, never deductible.
On the other hand, non-cash property settlements if meted in installments or lump sum, in both cases do not qualify as alimony.
Also, voluntary payments that are not needed for separation instrument or divorce decree, do not qualify as alimony.
How Much Tax is levied on Alimony Received?
The amount that one pays on receiving alimony depends on overall income annually.
You may have to take the help of a tax attorney or divorce attorney or for that matter, an accountant to understand the exact numbers to plan the tax payments accordingly.
The one who pays tax on alimony received must follow the rules of IRS against front-loading, which means advance payment of alimony due later.
It is advisable that alimony must not be front-loaded or excessively high for the first three years after separation as excessive payments will be subjected to being taxed or recaptured to the payer in the third year of post-separation.
How to Calculate and Save Tax Payable on Alimony Received?
Sometimes, the tax on alimony can prove beneficial for both parties. A divorce attorney can help with a tax deduction and lowering the burden of alimony tax.
One way to achieve this is to transfer alimony from a higher-earning spouse to another who has a lower earning capacity.
Thus, the higher earner can save money that goes towards the IRS while, the tax bracket of the recipient remains unchanged.
For example: Say, a higher earner, has $200,000 as taxable income for the year. He/she pays alimony amounting to $80,000 annually to the spouse.
Now the one who earns more will have to pay an income tax on $120,000 and not $200,000.
However, the receiver may pay tax on $80,000 amounting to payable $16,000. Thus, the payer saves more than this amount.
Note that the payer, who has to pay approximately $50,000 on the income of $200,000, pays approximately only $24,000 on yearly income earned of $120,000.
Thus, the payment in between the two amounts to $40,000 in total or rather $10,000 less than what the high earner would have to pay before deduction of alimony payment.
How to Make Sure the Alimony Payment is Tax Deductible?
It is best to make alimony payments as per the divorce decree such as an agreement for marital settlement and separation or as stated by the court order.
Payments that are done on adherence to temporary support order will also qualify for tax deduction under Section 71 of the Internal Revenue Code.
A divorce lawyer will be able to arrange documents that contain details of alimony payments.
The amount paid must be described as that for spousal maintenance, support, or alimony.
The attorney will help clearly label these payments as deductible for the payor spouse and present it as taxable for the recipient spouse.
How to Claim Tax Deduction on Alimony?
It is possible to deduct the tax on the alimony payment amount even if you do not itemize the deduction during the income tax return.
You can use the standard income tax return method by submitting the IRS Form 1040 for claiming a deduction.
However, you may not be able to utilize the simpler Form 1040A or Form 1040EZ. You will also have to provide the social security number of your former spouse.
Thus, we can come to the conclusion that the person receiving alimony is the only one who has to pay tax on alimony received.
The person who pays alimony can receive a tax deduction on the paid alimony. IRS will not accept any rewriting of the tax code by any legal means.
Get in touch with a divorce attorney today to understand how to save tax or how much tax is due on alimony payment and how both the spouses can benefit through the process.