Tax Mistakes and Alimony
Tax Mistakes and Alimony in Texas
Alimony, also called spousal maintenance, is a court-ordered payment that is usually made by the spouse who earns the highest income. Alimony may be ordered by the court to assist the lesser-earning spouse in the transitional period of starting over and establishing a means to earn a living. Alimony can also prevent the lesser-earning spouse from having to drastically lower their standard of living immediately following the divorce. Because alimony laws exist to help a spouse ease into life after divorce while maintaining their living standard, alimony is not awarded in situations where both couples are equally employed.
The Tax Consequences of Alimony Payments
Alimony is treated as taxable income to the receiving spouse by the Internal Revenue Service (IRS) and it is treated as income for the purpose of filing your annual tax return. Additionally, the paying spouse can claim the payments as a deduction from their taxable income on their annual tax return. Due to the taxable nature of this type of support, the paying spouse should seek to pay more towards alimony than child support. Of course, if you are on the receiving end of the transaction, you will benefit more by receiving child support because child support is not treated as taxable income; child support is also not a deductible item to the paying spouse.
There may be situations when the paying spouse agrees to an increase in the alimony payments in exchange for a reduction in their child support payments since this would benefit them at tax time. Because the effect is to reduce their taxable income, the IRS has restrictions on the allocation of child support payments versus alimony and how they may be applied to taxable income.
A court order is necessary to qualify for an alimony payment deduction. IRS requires the court order and will accept a copy of the divorce decree as proof. Problems can arise, however, when support payments are ordered or agreed to, but the order does not specify how much of the payment is for child support and how much is alimony. This situation can create confusion regarding how much of the payment is deductible by the payer or how much must be reported as income by the recipient. When situations such as this arise, the IRS will rely upon the specific facts of the divorce and the wording of the divorce decree when deciding which expenses are deductible and which will be considered taxable income. Typically, the IRS will consider unallocated payments as alimony causing them to be treated as taxable income to the recipient.
Zinda Law Group
There can be tax implications to the payment or receipt of alimony, so it is always advisable to understand what these consequences are. It is also advisable to seek the counsel of a knowledgeable divorce attorney. An experienced attorney can provide invaluable information and help you plan your tax strategy. The attorneys at Zinda Law Group have the knowledge and expertise to help you through all of your divorce issues, including the payment of alimony vs. child support. Call us today to speak with an attorney about your alimony issues. (800) 863-5312