At the time of divorce, one of the most complex and contentious issues for couples is resolving alimony payments. Alimony, also known as spousal support, is money paid from one ex-spouse to another to help maintain an equitable standard of living. In any divorce, monies paid from one ex to another will fall into the category of alimony, child support, or the division of property. For couples, alimony falls into a different tax category, meaning that it will reduce the income of the paying spouse and increase the income of the receiving spouse. For the IRS, this means that alimony will be taxed differently.
Courts will look at characteristics of the payments to determine whether they are alimony. This means that you cannot simply disguise the payments as child support or property division to get out of paying taxes. Our Birmingham alimony attorneys are experienced with the complexities related to division of property, alimony, child support and the potential tax consequences you may face. Before settling a divorce agreement or a prenuptial, you should consider the potential tax consequences in the long-run. You should also have a clear understanding of your rights and obligations to avoid potential liabilities.
Despite any agreement that states, “This settlement should be treated as alimony for tax purposes,” the court will look at the condition of the agreement to ensure that the payments are, in fact, alimony. If you are required to pay alimony, remember that your payment is tax deductible. If you are receiving alimony, remember that this is considered income by the IRS and you will have to pay taxes as though you would any income.
To take advantage of tax deductions, make sure to file a separate 1040 from your ex-spouse. You should also make sure you are no longer living in the same household and the alimony is not going to shared expenses. Alimony must be paid in cash or equivalents such as check or money order. Simply put, you cannot transfer goods or services in exchange for alimony. You can, however, make payments directly for housing, medical, taxes, tuition, or to third-parties, including lenders or attorneys. Remember that child support is separate from your alimony and should be paid separately. In the event that your spouse dies, you are no longer obligated to pay child support. This is one of the requirements of child support. You can also deduct payments made for life insurance if your ex-spouse is the beneficiary.
In any divorce, tax liabilities and the details of a settlement could have a significant impact on your legal rights and financial liabilities. Before signing an agreement, you should consult with an experienced divorce attorney as well as a tax law specialist to assess your individual circumstances. There are always traps for the unwary and you could lose significant assets or investments by entering into an unclear settlement agreement. Whether you are collecting or paying out alimony, you want to know your rights and obligations.
Contact Alabama Divorce & Family Lawyers, LLC Attorney Richard Perry at (205) 255-1155.