Divorce is bad enough. Who wants to think of taxes when their marriage is falling apart? You may not want to, but you probably need to consider how alimony will impact your tax situation.
When filing for divorce, spouses have a lot of issues to deal with – child custody, division of property, lifestyle changes. One issue that often gets overlooked in the tumult of a divorce is the tax implications of alimony payments. Alimony payments can and do impact spouses’ tax liability, and spouses in a divorce action need to consult with their divorce attorney and accountant to determine their best course of action.
In general, ex-spouses receiving alimony payments must pay taxes on that income. Spouses paying alimony get to deduct those payments on their tax forms.
Because taxes are not withheld from alimony payments, the spouse receiving those payments may need to make estimated tax payments or increase withholdings from their paycheck to avoid being hit with a tax bill when they file their annual return. Spouses receiving alimony payments will also likely have to fill out longer, more complicated tax forms because of this income. Alimony payments are reported on line 11 of the Form 1040.
With regard to ex-spouses making payments, he or she now can deduct those payments from their tax forms. The paying spouse deducts alimony payments on line 31 of his or her Form 1040. The paying spouse will need to list his or her ex-spouse’s Social Security number on the form as well. The IRS requires this information, and spouses who refuse to provide a Social Security or tax ID number face a penalty from the agency.
Ex-spouses who are paying alimony to non-resident alien ex-spouses must withhold 30 percent of the payment for taxes. Divorcing spouses also sho
uld be aware that lump sum alimony payments – that is, arrangements where spouses take care of their alimony obligations in one fell swoop – are not deductible or reportable as income.
Everyone’s tax situation is different, and the tax implications of receiving alimony payments may impact some spouses more greatly than others. In some cases, negotiating for more child support and less alimony, or more alimony and less child support may be beneficial to divorcing spouses. Also,
certain payments to ex-spouses, such as mortgages, taxes, utilities, and repairs on property an ex-spouse owns that they are allowing the other ex-spouse to live in rent-free do not count as alimony. These payments do not have to be reported as income by the receiving spouse and cannot be taken as a deduction by the paying spouse.
When getting a divorce, it pays to work with an experienced family law attorney and a financial professional who can advise you on the best course to take with regard to your personal finances.
The Micklin Law Group, LLC is a New Jersey law firm specializing in family law and divorce. Attorney Brad Micklin was recently named to The National Advocates list of Top 100 attorneys from each state. To set up a consultation, call 973-562-0100.