Whether you pay or receive alimony, the tax implications of alimony are far reaching.
Generally, alimony is taxable as income to the recipient and tax deductible for the payor. However, the IRS is not bound by a state court order that labels a payment from one party to other as alimony. Simple labeling a payment as alimony in a divorce order is not enough to make the payment tax deductible to the payor.
Alimony must meet the following requirements in order to be considered tax deductible by the IRS:
- The payment must be made from the payor to the payee in cash or its equivalent. For example, I do not think paying the former spouse’s cell phone bill would be considered alimony.
- The payor and the payee cannot live together. Otherwise, couples could divorce while remaining in the same home in order to reduce their taxes since the lower earning spouse’s income is generally taxed at a lower rate than the higher earning spouse.
- The payments must terminate upon the death of the payee. While most alimony payments also terminate when the payor dies, this is not a requirement. Very often life insurance proceeds can take the place of alimony payments after a payor dies.
- The court order that requires the alimony cannot state that the alimony is non-deductible to the payor and non-taxable to the payee. So, essentially, it is easy to make the alimony payments non-deductible to the payor (and non-taxable to the payee) by simply stating so in the court order.
- Payments must be made pursuant to a court order. In Florida this includes a final order in a divorce (dissolution of marriage) case or a separate maintenance order. In short, a separate maintenance case is brought by one spouse that asks the court to order the other spouse to provide support (child support or alimony or both) without asking for a dissolution of the marriage. I do not believe that a written agreement between the parties (e.g. a port-nuptial agreement) is sufficient. A judge’s signature is required.
- The payors tax return must include the payee’s Social Security number. This is so the IRS can verify that someone is paying taxes on the income. A payee that does not include alimony they have received on their tax return will almost certainly be contacted by the IRS and be responsible for the additional tax (along with penalties and interest).
At the Law Office of A. James Mullaney, we use software that estimates your taxes if alimony payments are made in your case. Since alimony paid or received affects the incomes of the parties, alimony affects any child support calculation as well.