By Leonard Villafranco
Alimony and Taxes
The IRS usually allows a tax deduction for the payment of alimony. The deduction is granted because the recipient is taxed on alimony. Former spouses end up paying less in taxes because the parties are shifting income from a higher to a lower tax bracket by transferring alimony from the higher income spouse to the lower income spouse. The high earner saves money that would otherwise be paid to the IRS. The recipient usually benefits because the payer is more generous because of the tax savings.
Not all payments qualify as deductions. The IRS imposes several requirements upon taxpayers seeking a deduction for the payment of alimony. First, payments must be made directly to or for the benefit of a spouse or former spouse. Next, payments must be made in accordance with a divorce document such as a marital settlement agreement, separation agreement, court order, or divorce judgment. One should make a designation in the divorce document labeling the payments as deductible by the payer and taxable to the recipient. Further, the parties must live apart. Only payments must be made after a physical separation are deductible to the payer.
The divorce document must also condition that alimony will terminate upon the death or remarriage of the recipient and include that condition in the divorce document. Note that Martin and St. Lucie County Courts now provide that alimony may be modified upon the recipient’s cohabitation with another. The divorce document must maintain a clear division between alimony and child-related events. If alimony is terminated upon the emancipation of a child, you run the risk of the IRS reclassifying past alimony as non-deductible child support. Past alimony deductions may be disallowed and back taxes may be owed.
Lastly, the parties must follow IRS rules against front-loading. Alimony should not be excessively high or front-loaded in the first three post-separation years as excessive payments are subject to recapture or being taxed to the payer in the third post-separation year.
If you would like to speak to an attorney about this, or any other legal issue, you can contact Leonard Villafranco at (772) 871-6441 or (772) 288-7338.
This column is an overview of the subject matter and is not intended as legal advice. Leonard Villafranco is an attorney practicing law in Stuart, FL and St. Lucie West.
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Filed under: Family Law
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