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Alimony and how it can affect your taxes

Whether you are the payer or the recipient of alimony in a divorce or legal separation, you should know where to claim it on your tax return, and how it will affect your bottom line.

The Internal Revenue Service considers alimony, or spousal support in layman's terms, to be taxable income. This means that if you are the recipient, it must be reported. If you are the payer, you may claim it as a tax deduction. However, there are a few exceptions to this rule.

First, let's review the requirements of a payment to be considered true alimony as defined by the IRS. There are a number of requirements that must be met, including, but not limited to:

  • The spouses don't file a joint return with each other
  • The payment is in cash, including checks or money orders
  • The payment is to or for a spouse or a former spouse made under a divorce or separation instrument;
  • The divorce or separation instrument doesn't designate the payment as not alimony
  • The payment isn't treated as child support or a property settlement

In addition, there are several types of payments that can often be misconstrued as alimony when they are, in fact, not considered so by the IRS. Those are child support, noncash property settlements, use of the payer's property, payments to keep up the payer's property, payments for community property, and voluntary payments.

Now that we have an understanding of what is and what is not considered alimony, let's go back to those exceptions we mentioned earlier. If your ex-spouse who has been ordered to pay you alimony does not claim those payments on his or her tax return as a deduction, then you do not have to claim it as taxable income. However, it does not make a difference to them which spouse pays those taxes, but they only need to be paid once.

The IRS will pay close attention to alimony deductions on your tax returns within the first three years after a divorce. This is because most property settlements are completed within those first three years, and are sometimes thought by one or both spouses to be the same as alimony. For these reasons, the IRS maintains a "Recapture Rule". Because these rules are detailed and an important part of any divorce, working with an experienced attorney can be of great help in navigating tax consequences.

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