Alimony is a form of financial support that is awarded to a spouse as part of the divorce decree. The intention of alimony is to help the less financially viable spouse maintain the lifestyle that he or she had during the marriage. The amount and duration of payments depends on the former spouse's ability to pay, and the needs of the receiving spouse. Individual circumstances such as the length of marriage, number of children, and each spouse's education level are also considered. Alimony also comes in several forms, depending on the duration of marriage and the receiving spouse's ability to achieve financial independence. For instance, a wife who is elderly and has spent the entire marriage being a mother and homemaker is unlikely to find a job that pays more than minimum wage. This type of spouse may be eligible for “permanent alimony”, whereas a spouse who has the means to eventually gain financial independence may only be awarded temporary, or “rehabilitative alimony”.
Alimony Payments After A Divorce
No matter which form of alimony you receive, it is important to understand how these payments affect your taxes. As a general rule, alimony payments are viewed as “earned income” by the IRS. This means that it can be used as a tax deduction by the paying spouse, as long as there is a valid court order and the payments are made in cash, check or money order. For the receiving spouse, it is considered taxable income, for which the IRS will expect payment. The only exception to spousal support being treated as taxable income is if the divorce decree explicitly states that such payments are not alimony, even though they would qualify as such. The only other exception is in the case where divorced spouses are still living together. Even if you are paying your spouse court ordered alimony, living in the same household automatically disqualifies these payments from being used as tax deductions or taxable income. It should also be noted that these rules apply only to alimony, not child support, which is another form of domestic support. Unlike alimony, child support is not considered taxable or tax- deductible income by the IRS.
Spouses must also take care not to include any type of property transfers or settlements as part of their alimony payments. It is tempting to do so because of the increased tax deduction, but the IRS has alimony recapture rules to prevent such “front- loading” practices. The recapture rules require that alimony payments of $15,000 or over are structured as equal payments for at least the first 3 years. This allows the IRS to scrutinize tax returns for “excessive” deductions, which may be property transfers disguised as alimony. There are exceptions to the recapture rule, such as alimony payments ceasing or being altered due to the remarriage of the receiving spouse. Another common exception is if alimony payments are stopped due to the paying spouse's death within the first three years. There are steps you can take to avoid recapture, which you should discuss with your divorce lawyer. Your lawyer can advise you on many key factors related to your taxes, such as whether you should divorce before or after December 31, and if you should wait till the end of the calendar year to start alimony payments.
Speak With A Certified Matrimonial Attorney
If you have questions about how alimony will affect your taxes, please call Villani & DeLuca, P.C. at (732) 965-3404. Certified Matrimonial Attorney and Economic Mediator Vincent C. DeLuca, Esq. will be happy to address all your concerns during a free initial consultation.