As we have noted before, individuals going through the divorce process are often overwhelmed and stressed out. It’s a time of emotional turmoil—but the implications of the proceedings will impact both individuals for years to come, so it’s important that important details aren’t neglected.
One topic which is often overlooked is the tax implication of alimony payments. Forbes.com recently shared several valuable tips to keep in mind as you pursue a fair divorce settlement:
1. The federal tax treatment of alimony is directed by the Internal Revenue Code, not by divorce agreements or court orders.
2. In general terms, alimony is typically taxable income for the recipient and a tax deduction for the payor.
3. First, let’s consider the situation if you are the payor of alimony. As outlined by the IRS in Topic 452 –Alimony Paid, alimony is a tax deduction for the payor, if:
- You and your spouse or former spouse do not file a joint return with each other.
- The payor pays in cash (including checks or money orders).
- The payment is received by (or on behalf of) your spouse or former spouse.
- The decree of divorce or separate maintenance (commonly referred to as a legal separation) does not say that the payment is not alimony.
- Legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment. In other words, you cannot live together after divorcing . . . and don’t think it’s “okay” if he simply starts sleeping in the maid’s quarters. According to the IRS, the home you formerly shared is considered one household, even if you physically separate yourselves in the home.
- You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse, and
- Your payment is not treated as child support or a property settlement.
4. If you are the recipient of alimony, you must report the full amount as income on your tax returns. Failing to report alimony is very likely to result in an IRS audit. Remember: Since the alimony paid is a tax deduction for the payor, the IRS can easily determine how much alimony you received.
If you would like to learn more about the tax implications of your divorce settlement, please feel free to contact us today. I’d also like to take this opportunity to urge you, if you haven’t already done so, to speak to a forensic accountant about your situation. A divorce lawyer alone is not enough to ensure that you receive a fair settlement, as they do not have the experience and the training of a forensic accountant. Don’t delay—call the team at Kane Forensic today!