Are You Entitled to Alimony?
During a divorce, there are four main ways to transfer assets in the event of a divorce: property settlement, retirement accounts, child support, and alimony. Although the first three can be difficult to determine, alimony is perhaps the most complicated.
What is Alimony?
Also known as spousal support, alimony is money paid from the spouse who earns more to the spouse with less income or other financial resources after a divorce. Because of this, alimony is only awarded to one of the spouses. Alimony comes from the future earnings of one of the spouses and is paid over a set period of time. Alimony may come in the form of direct payments such as a monthly check or deposit, or it may come in an indirect way such as one spouse paying the other’s rent or other bills. Not all divorce decrees include alimony, especially if the marriage was brief or both spouses earned around the same level of income. Any voluntary payments that go beyond the scope of alimony in the divorce decree are not considered to be alimony.
What are the Tax Consequences of Alimony?
The spouse who receives the alimony payment must declare it as income, and the spouse who pays it may deduct it. In this way, alimony differs from child support payments because child support payments are included in the payor’s income but not in the recipient’s income. Attempts to disguise alimony as child support are clearly looked down upon by courts and the IRS. Therefore, there are strict rules and definitions for what counts as alimony and child support from a tax perspective. For example, if alimony payments are supposed to continue even if the receiving spouse dies, then they will likely be considered child support instead of spousal support. Additionally, if alimony payments terminate around the time that one of the children turns 18, this may be considered a child support payment. Different tax rules also apply if both former spouses continue to live in the same household after their divorce.
In a divorce, it is common to want to try to get a clean slate and sever ties with your former spouse as quickly as possible. Therefore, the spouse who is paying alimony may attempt to pay off the alimony early. This can have negative tax consequences because it will look more like a property settlement in the eyes of the court and the IRS. If this happens, the paying spouse may have to “recapture” the alimony that he or she already paid by declaring it as income, effectively losing whatever tax benefit he or she had obtained from paying alimony instead of a different kind of settlement. Consequently, the recipient would then be able to deduct all of the front-loaded alimony that he or she received.
Representation for a Divorce Agreement
There are potentially hundreds of thousands or even millions of dollars on the line due to potential tax pitfalls alone when it comes to alimony whether you are the receiver or the payer. Before negotiating a divorce agreement, contact the Law Office of Renkin & Associates for representation in your divorce proceeding. We will fight for what is yours – from both your soon-to-be-ex-spouse and the government.