Archive for April, 2015

Support, Alimony and Taxes

Support payments, or alimony, are those payments required in a written divorce settlement. They do not include child support or any good will payments that are given in addition to the support requirements. When structured correctly the support payments are deducted by the payer and must be included as income by the recipient.

Payments ARE alimony if all of the following are true:

  • Payments are required by a divorce or separation instrument.
  • Payer and recipient spouse do not file a joint return with each other.
  • Payment is in cash (including checks or money orders).
  • Payment is not designated as something other than alimony, like a property settlement.
  • Spouses legally separated under a divorce decree or separate maintenance decree must have separate households.
  • Payments are not required to continue after death of the recipient spouse.
  • Payment is not treated as child support.

Payments are NOT alimony if any of the following are true:

  • Payments are not required by a divorce or separation instrument.
  • Payer and recipient spouse file a joint return with each other.
  • Payment is:
  • Not in cash,
  • A noncash property settlement,
  • Spouse’s part of community income, or
  • To keep up the payer’s property (buying out an interest in an asset).
  • Payment is designated in the instrument as something other than support or alimony.
  • Spouses legally separated under a decree of divorce or separate maintenance maintain the same household.
  • Payments are required after death of the recipient spouse.
  • Payment is treated as child support.

Divorce decrees or Marital Separate Agreements must be in writing to be used to support the deduction of spousal support. These “decrees” can be of any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (which means while awaiting action on the final decree or agreement).

Per the IRS, what isn’t alimony or support is important to understand – especially in today’s world of stock options and similar types of compensation.

The most obvious forms of payment that are not alimony are child support payments, property settlements, and payments that are each spouse’s part of community income. In addition any payments used to keep up the payer’s property or one spouse’s use of the payer’s property are not support even though they have financial benefits.

The IRS notes that other payments which can be support payments include:

  • Payments to a third party. If, under the agreement, one spouse is required to make payments in behalf of the other spouse, those payments are treated as alimony even though the money did not go to the other spouse. These may include payments for your spouse’s medical expenses, housing costs (rent, utilities, etc.), taxes, tuition, etc. The payments are treated as though they were received by the recipient-spouse and then paid to the third party.
  • Life insurance premiums. Alimony includes premiums that must be paid under your divorce or separation instrument for insurance on the payer’s life to the extent that the recipient-spouse owns the policy.
  • Payments for jointly-owned home: If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse, some of your payments may be alimony (that is a separate issue the needs to be reviewed in each case).
  • Mortgage payments. If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Your spouse must report one-half of the payments as alimony received. If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest.
  • Taxes and insurance. If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. Your spouse must report one-half of these payments as alimony received. If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance.

If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance.

There is much more involved in the definitions, but this is a good overview. The material includes information and citations from the following sources that you can explore for more details.

http://www.irs.gov/taxtopics/tc452.html
http://www.irs.gov/publications/p504/ar02.html
http://www.divorcenet.com/states/pennsylvania/is_alimony_tax_deductible

 

By: Armand & Robbin D’Alo