The Tax Implications of Giving and Receiving Alimony
Alimony is the payment of funds from one ex-spouse to another, either to maintain the receiving party in a standard of living comparable to that enjoyed during the marriage, or to compensate the receiving spouse for special contributions or other sacrifices made during the course of the marriage. Alimony is tax deductible by the party paying it, and taxable income to the party receiving it.
Tax deductions for alimony are claimed on Form 1040 when it comes time to file your tax return. On the form, the social security number of the receiving spouse must be included. The receiving spouse then should report the full alimony award as income on line 11 of Form 1040 when filing his or her taxes.
Avoid Alimony Schemes Used for a Tax Benefit
This tax treatment of alimony, together with the fact that typically the party paying the alimony is in a higher tax bracket than the party receiving the alimony, has proved to be a temptation to many parties in a New Jersey divorce action. Specifically, the temptation is to characterize the division of property as alimony. This is done so that the party in the higher tax bracket receives potentially large tax deductions simply for giving up some of the marital property to the other person, while not making any real payment of funds to that party.
This temptation has been yielded too often enough, in New Jersey and in other states, to have caused the IRS to draft specific rules to prohibit and punish the practice of disguising the division of property as alimony in divorce agreements. For example, where the amount of alimony paid by one party to the other drops in one year more than $15,000.00, and within the first three years after divorce, the IRS will not consider the higher payment in the previous year or years, or the lower payment in the current year, to be alimony. Rather, the IRS will require the paying party to pay back to the IRS the value of the deductions taken to date under the payment scheme.
How Alimony Affects Your Taxes After Divorce
Although you will obviously want to steer clear of getting on the wrong side of the tax laws when structuring your divorce agreement, there are creative ways of structuring bona fide alimony in order to minimize overall taxation. Any alimony payments made under the written separation agreement can be tax deductible, as long as the following requirements are met:
- The couple doesn’t file a joint tax return
- Alimony payments are made in cash, check or money order
- Spousal support is not permanent alimony
- The agreement doesn’t say the payment is not alimony
- If legally separated, the couple is not living together when making payments
- The receiving spouse is still alive
- It is not child support
If you are about to go through a divorce in New Jersey, and alimony may be sought after your divorce, you should seek the counsel of a competent and experienced New Jersey family law attorney.
Call a Lawyer About Your Divorce-Related Tax Questions
Vincent C. DeLuca of Villani & DeLuca, P.C., is certified by the New Jersey Supreme Court as a Matrimonial Attorney. Mr. DeLuca is one of a limited number of attorneys to hold this prestigious certification of Matrimonial Attorney in New Jersey. Mr. DeLuca’s practice is devoted to family law in Ocean County and Monmouth County. Call Villani & DeLuca today to get your free initial consultation and discuss your divorce questions with an experienced divorce attorney. One of Villani & DeLuca’s divorce lawyers will strive to provide you with all of the answers you need.