February 13, 2013
Article By: William Dorsey
Contact Us With Your Divorce and Alimony Law Questions.
Fiscally shrewd ex-spouses know that a world of difference can exist between characterizing a payment as alimony, as opposed to child support, when tax time comes around. That’s because periodic alimony payments are usually income tax deductible, while child support payments are not. The Internal Revenue Service, however, has a menagerie of requirements you must meet in order to qualify for the alimony deduction.
First, the payment you make must be pursuant to a divorce or settlement agreement that is contained in written form. Additionally, you and your spouse must be completely separated from each other. This means you must live in separate residences, and must not file a joint federal income tax return. If you still live together, the IRS may contend that the money is actually paying for your share of the household expenses (such as utility bills,) and disallow the deduction.
Also, the payment must be monetary – either cash or check. The payment must indicate that it is for alimony or spousal maintenance, and is to your ex-spouse or for her benefit. Giving your ex-spouse property (such as a car), does not constitute alimony in the IRS’s view. However, you can pay her bills for her. As long as it is a cash or check, for her benefit, you can pay her mortgage bill, her education tuition, her medical expenses, her taxes or the premiums on a life insurance policy she owns. To ensure this approach is deductible, your ex-spouse needs to send you a written document informing you that she would like you pay a certain a certain third party (or parties,) and that the payment is in place of paying her directly.
Payments made on a property may or may not be deductible as alimony. If you allow your ex-spouse to live in a property you own, neither your mortgage payments on that property, nor your lost rental income, constitutes alimony. However, if you and your ex co-own a property, and you pay the full mortgage payment on that property, you may deduct half of those payments as alimony.
Make sure your payments are not designated as child support or tied to events in your children’s lives. The documents must state that the payments end upon your spouse’s death. As an example, if your arrangement says you must pay your ex-spouse $6,000 per month, until your child turns 18, then $2,000 each month thereafter, the IRS will view only $24,000 of the annual payments as alimony, and will deem the other $48,000 you paid each year as non-deductible child support. Note that the IRS can go back and re-classify past alimony as child support, retroactively disallow the deductions, and declare that you owe back taxes.
Furthermore, be careful about “front-loading,” or paying extremely large amounts in the first months or years of the arrangement. Section 71 of the Internal Revenue Code prohibits front-loading alimony payments in the first three years after you and your spouse separate. The reason for this rule is to prevent taxpayers from hiding property settlement payments under the guise of alimony.