Staying mindful of tax rules for alimony can eliminate trouble

Any California resident who has been through a divorce knows that taxes can figure prominently during negotiations to end the marriage and apply to alimony as much as child-support payments and property division. Generally, alimony is money paid by one spouse to the other once the divorce is finalized. It is calculated based on a preset statutory formula that considers many factors before setting a monthly alimony payment that is supposed to be manageable for the payer.

In general, the paying spouse can deduct the amount from the person’s total income, thus reducing that spouse’s tax liability. The alimony recipient, on the other hand, must include alimony income on that person’s tax filing. In the event one spouse lists an amount that does not match that claimed by the other, then the IRS is likely to perform an audit to uncover why there are discrepancies. One federal report said nearly half of all tax returns filed by those givers and receivers did not match and led to audits.

If you are the alimony payer, you must make sure of a few things in order for alimony to be deductible. Make sure neither you nor your ex-spouse is filing a joint return. Second, be sure to make alimony payments in cash, by check or by money order. Third, the divorce decree that ended the marriage should include no wording that indicates any payments made are to be considered anything other than alimony — they are not gifts or cash settlements.

Understanding the relationship between taxes and child-support and alimony payments and related family law issues is important. The tax implications of support can have long-term financial impacts for both spouses, so it is advisable to address them completely during divorce proceedings.

Source: Fox Business, “The Tax Rules of Alimony,” Bonnie Lee, June 12, 2014