Divorcing couples are often surprised by the interplay of alimony and taxes. Though many couples don't realize it, spousal support carries a number of tax implications.
For starters, spousal support can be either taxable or tax deductible, depending on whether you're receiving support payments or making them. And there may be other considerations as well, depending on your circumstances.
Here are three reminders to keep in mind about spousal support and taxes:
If you pay spousal support, it's generally tax-deductible. Spousal support is typically tax deductible for the person paying the support, if certain requirements are met. Note that the same does not hold true for child support or property distributions. Certain types of payments involving an ex-spouse, however, aren't fully deductible. For example, if you and your ex still own a home together and share the expenses, you can only deduct half of the mortgage payment amount as spousal support. On the upside, you're entitled to half of the mortgage interest deduction, too.
If you receive spousal support, it's generally taxable income. If you receive spousal support, then you should financially prepare to pay taxes on it because it's considered taxable income. The same goes for payments made to third parties on your behalf (such as mortgage payments). If you're a stay-at-home parent, you may want to soften the tax blow by paying an estimated tax each quarter to the IRS and your state. If you're working, you may want to consider increasing the amount that's automatically withheld from your paychecks.
Payments by decree are not necessarily spousal support. A divorce decree is the final judgment in a divorce proceeding that spells out each party's obligations. But not all payments under a decree are considered alimony. For example, alimony doesn't include child support, non-cash property settlements, payments that are your spouse's part of community property income, payments to keep up the payer's property, or use of the payer's property. To be deductible, your payments by decree must meet certain requirements to be considered spousal support.
In some situations, a marital settlement agreement or decree may explicitly spell out which payments are to be considered spousal support and which are not. Your finalized agreement is a good place to start when figuring out which payments you should report or deduct for tax purposes.
For more help with the tax implications of spousal support, you may want to consult an experienced tax attorney. Your tax attorney can help you figure out a plan that puts the most money in each person's pocket after taxes are taken into account.
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