Tax-Deductible Alimony Payments: How to Ensure Yours Are Deducted
Not all alimony payments qualify for federal tax deductions, but many do. If ensuring your alimony payments are tax-deductible is important to you, you must comply with the IRS requirements.
There are seven specific IRS requirements imposed on alimony payments to ensure that they are tax-deductible, listed below:
- Payments must be made in cash or by check. No other type of payment will be tax-deductible, including payments made by handing over objects of value, by labor, or by any other means.
- Payments must be made in accordance with a divorce agreement or a temporary version of one. The divorce agreement as well as documents demonstrating payment should state the amount to be paid, labeled as “alimony” or with a similar term, and should state outright that the payments are deductible for the paying party and taxable to the party that receives the payments.
- Payments should never be designated for anything other than alimony and spousal support. For instance, it is easy for payments made by the paying party to casually creep into undefined monetary contribution, to lose the alimony label and be used for child support or as part of a property settlement, or to become tied to the age or condition of your shared children. But each of those things would result in your alimony payments being taxed. The IRS will even reclassify past alimony as nondeductible and require the payment of back taxes if necessary.
- Payment-related documents should indicate that if the receiving spouse dies, then payments terminate. Without this provision, the payments may not be considered alimony by the IRS and therefore will not be subject to deductions.
- All payments should be made while the paying party and the receiving party are living separately. If the two parties are living together, the payments will not be considered alimony for purposes of tax classification and therefore will not be tax-deductible.
- Neither party should file a joint tax return. Filing a joint tax return eliminates parties’ ability to deduct alimony payments.
- The IRS prohibits a practice called “front-loading”. Front-loading is the advance payment of alimony that is in fact due to be furnished later on down the line. While establishing higher alimony payments in the first three years after the end of the marriage or the separation, the IRS will consider the practice to be front-loading and will tax the payments, and may issue back taxes if necessary.
Following these seven IRS rules will assist you in ensuring that alimony payments are tax-deductible. However, it is worth noting that the navigation of compliance with divorce agreements and alimony payments can be complicated, and certainly goes beyond the seven basic guidelines listed here. Whether you are just starting out down the path to divorce or separation or you have been working under the requirements of your divorce agreement for some time, experienced legal counsel can assist you in protecting your rights and interests. Contact the Boca Raton attorneys at Schwartz l White at 561-391-9943 today for a consultation.