How Does Alimony Affect Taxes?

Getting a divorce is not only difficult emotionally, it can be a financial nightmare as well. Many times a divorce agreement states that one party has to pay the other alimony. This may leave both parties asking themselves “how does alimony affect taxes?”

If you pay alimony….

Although you may not be happy about making an alimony payment each month, there is an upside at tax time. However in order to write off alimony at tax time you will need to follow these rules. First, you must make alimony payments with a cash or check. “Gifts” such as a car or other property of value in lieu of a cash payments are not eligible for a tax write off. Second, you must make monthly payments in accordance with your divorce agreement. Prepaying for a year or making other large lump sum payments may raise red flags with the IRS and cause a loss of the deduction. And most importantly you and your ex-spouse must live apart and file separate tax returns.

In order to make the deduction on your tax return you must include your ex-spouses tax ID number so the IRS can cross reference the income on their tax return.

If you receive alimony….

If you receive alimony payments you must pay all applicable taxes on the income. Furthermore because no taxes are withheld from alimony payments, you may need to make quarterly estimated tax payments to the IRS and/or have more taxes deducted from your paycheck. If you choose not to do this you may end up owning the IRS when filling your final return for the year. And finally you must itemize each alimony payment using the long form 1040 tax form.

Major life changes, like a divorce, can bring up many unknown questions. At USA Tax Prep Plus we’ll help you navigate this unfamiliar territory at tax time so you can rest easy. Contact USA today and see how we can help you.