Do I Have to Pay Income Tax on Alimony?

Posted on in Alimony/Spousal Support

alimony, DuPage County divorce attorneysIn an Illinois divorce, the court may award long-term maintenance, or alimony, to either spouse based on a number of factors. Long-term alimony is generally appropriate when one spouse is unable to earn an independent living. Depending on the case, spousal maintenance may last for a set number of years or continue indefinitely until either party dies or the recipient remarries.

Defining Alimony for Tax Purposes

As a general rule, the Internal Revenue Service considers alimony to be a form of taxable income. This means the receiving spouse must report all maintenance payments for the year on his or her federal income tax return (usually Form 1040) as part of his or her gross income. Conversely, the spouse who pays alimony can deduct it from his or her own gross income.

There are several conditions that must be met for alimony to be considered taxable income:

  • The spouses do not file a joint return for the tax year when the payments are made and received;
  • The payments are made in cash, including checks or money orders;
  • The payment is made pursuant to a formal divorce decree or separation agreement;
  • The said decree or agreement does not expressly define the payment as something other than alimony;
  • If the spouses are legally separated, but not officially divorced, the parties are no longer living together in the same household;
  • The payments do not continue in the event of either spouse's death; and
  • The payments do not constitute any form of child support or satisfaction of a non-cash marital property settlement.

It is important when negotiating a divorce settlement to be clear what payments from one spouse to another should be considered maintenance. For example, in a recent federal Tax Court case, an ex-husband claimed a deduction of over $46,000 for what he characterized as alimony payments to his ex-wife. She never reported this as income, however, and the IRS and the Tax Court determined that under the terms of the couple's separation agreement, the payments in question were “excludable and non-deductible payments.” As a result, the ex-husband must pay the IRS more than $18,000 in back taxes and penalties.

Distinguishing Child Support From Alimony

As noted above, child support payments are not alimony and therefore not reportable as taxable income by the recipient or deductible by the payor. In cases where a divorce decree or separation agreement awards one spouse both alimony and child support, the latter takes priority for tax purposes. For example, assume a divorcing couple agrees that Spouse A will pay Spouse B $500 in child support and $500 in alimony each month–a total of $1,000. One month, however, Spouse A only pays Spouse B $600. In that case, Spouse B need only report $100 in taxable income, as Spouse A's payments must be applied to the child support first.

This is only a brief overview of the tax issues that could arise in the context of divorce. A qualified DuPage County family law attorney can provide you with more detailed answers to your questions. Call 630-871-1002 for a free consultation at any one of our three offices today.

Sources:

https://scholar.google.com/scholar_case?case=4090553016320096359

https://www.irs.gov/taxtopics/tc452.html

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