The government levies tax on alimony payments. Alimony counts as an income for the spouse who is receiving the amount. If you are a spouse sending the alimony, 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 spouses consider alimony for federal tax under the following conditions:
- you and your spouse have not filed joint returns with each other.
- The payment makes in cash, including money orders or checks.
- Separated legally abiding by the decree of separate maintenance or divorce, you and your former spouse are not the same household members when you make the payment.
- Payment made is for the care of your spouse or former spouse.
- The separate maintenance or divorce decree or written separation agreement fails to state that the price is not alimony.
- The payment uses 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.
The following payments are not considered alimony under separation instrument or divorce:
- Payments for the use of the payer’s property.
- Child support.
- Prices make to keep up the property of the payer.
- The payment becomes part of your spouse’s community property income.
- Non-Cash settlements of property.
Suppose your divorce decree or separation maintenance agreement provides for child support alimony. In that case, you pay lesser than the total needed, but payments first apply for child support and the rest amount 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 unnecessary for separation 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 IRS rules against front-loading, which means advance maintenance payment is due later.
It is advisable that alimony not be front-loaded or excessively high for the first three years after separation, as excessive payments will be subject 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 alimony tax can prove beneficial for both parties. For example, a divorce attorney can help with a tax deduction and lower the alimony tax burden.
One way to achieve this is to transfer alimony from a higher-earning spouse to another with a lower earning capacity.
Thus, the higher earner can save money toward the IRS while the recipient’s tax bracket remains unchanged.
For example: Say a higher earner has $200,000 as taxable income for the year. In addition, they pay alimony amounting to $80,000 annually to the spouse.
The one who earns more will have to pay an income tax of $120,000, 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 payer, who has to pay approximately $50,000 on an income of $200,000, spends roughly $24,000 on a yearly income of $120,000.
Thus, the two payments amount to $40,000 instead of $10,000 less than what the high earner would have to pay before the alimony payment deduction.
How to Make Sure the Alimony Payment is Tax Deductible?
It is best to make alimony payments per the divorce decree, such as an agreement for marital settlement and separation or as stated by the court order.
Payments clear on adherence to temporary support orders 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.
Must describe the amount paid for spousal maintenance, support, or alimony.
The attorney will help label these payments as deductible for the payor’s spouse and present them as taxable for the recipient’s 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 to claim a deduction.
However, you may be unable to utilize the more straightforward Form 1040A or Form 1040EZ. You will also have to provide the social security number of your former spouse.
Thus, we can conclude that the person receiving alimony is the only one to pay the alimony tax 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 spouses can benefit through the process.
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