Divorce, Alimony and Taxes - 2015 ANNUAL ROUNDUP

It's tax time again.  And that means it's time for the Annual Divorce, Alimony, and Taxes Roundup.  

Alimony, properly defined, is tax deductible to the payor, and taxable to the payee.  Child support has no tax consequences.

Alimony ("maintenance" under NYS Domestic Relations Law) is the payment of money by one spouse to the other after separation or a divorce.

Notice, I said "Alimony, properly defined" is tax deductible.  Be aware that the IRS imposes the following requirements on parties seeking to deduct alimony payments:

1. Make payments in cash or by check. You must pay alimony by cash or check for the benefit of a spouse or former spouse. The value of in-kind alimony—for example, giving your spouse your car—isn’t deductible.

2. Follow the documents and designate payments as tax-deductible. Make payments in accordance with a divorce document, such as a marital settlement agreement, separation agreement, court order, or divorce judgment. Payments made under to a temporary support order also qualify. (Section 71 of the Internal Revenue Code.) 

3. NEVER characterize payments as child support or a part of Equitable Distribution.  Child support has no tax consequences!  One must be sure that alimony payments are not tied in any way to supporting the children. The most common error is an agreement that ties a purported alimony payment to the date of the children's emancipation.  The IRS has the right to reclassify past alimony as nondeductible child support. Your past alimony deductions would be disallowed, and you would owe back taxes. Similarly, if a payment is seen as part of your division of marital property, it’s not tax deductible.

4. Specify that payments end at the recipient’s death. The marital settlement agreement or judgment must provide that alimony payments terminate when the recipient dies. (The document can also provide that the alimony obligation ends when the payor dies.) Most payors also have the right to terminate alimony if the recipient remarries.

5. Live apart. If you are still living with your spouse or former spouse, alimony payments are not tax deductible. Payments must be made after a physical separation.

6. Don’t file a joint tax return. If you and your spouse file a joint income tax return, you can’t deduct alimony payments.

7. DO NOT, REPEAT, DO NOT FRONT LOAD!  Make sure to follow IRS rules against front-loading—the advance payment of alimony that’s due later. Alimony should not be excessively high or front-loaded in the first three post-separation years. Excessive payments are subject to recapture or being taxed to the payor in the third post-separation year.

Make sure you have qualified attorney drafting your settlement agreement.

Juliana LoBiondo ("Mrs. Lo")

juliana@lobiondolaw.com