Tax Guide

How Alimony Affects Your Taxes

How Alimony Affects Your Taxes
Ines Zemelman, EA
10 December 2014

When you go through a divorce, you and your ex-spouse will need to come up with an agreement to fairly divide your assets. Since marriage is really a financial partnership, the divorce should ideally split everything in half. A big part of this process could be to decide on alimony payments. If you’ve agreed on alimony payments, it’s important to figure out how they will affect your taxes because this can be a situation that gets some taxpayers into trouble.

Update 2018

Under the new law, alimony and separate maintenance payments are not deductible by the payor spouse and are not includible in the income of the payee spouse. The effective date of this provision is delayed by one year. It is effective for any divorce or separation agreement executed after December 31, 2018.

What is Alimony?

Alimony is regular payments from one ex-spouse to another. Alimony usually is part of a divorce when one spouse earns more than the other during a marriage. The idea is that the spouse with less income was financially dependent on the earning spouse and would take a significant lifestyle hit without extra money. Alimony payments are there so that both parties maintain about the same lifestyle after a divorce.

What Sets the Alimony Payments?

When you go through a divorce, you and your ex-spouse will need to come up with a divorce agreement that states how you will divide your property and income. How you come up with your agreement depends on how you settle your divorce. Some couples use a mediator to set terms while others take the divorce to court and a judge decides on the divorce terms.

Either way, the divorce agreement is a legally binding document that must be followed. This includes the terms for alimony payments. Once a schedule is set for alimony payments, the paying ex-spouse must make the payments or will be breaking the law.

Do Alimony Payments Ever End?

The amount of time that the alimony payments will last depends on a few conditions. First, your divorce agreement might set a date when the alimony payments are scheduled to end. Also, the payments could end if the receiving spouse remarries. The payments could also end after a certain milestone is reached, like retirement or if the paying spouse loses their job, as outlined in the divorce agreement. Finally, a judge could reexamine the alimony terms later on and decide to end payments, for example if the receiving spouse didn’t make an “adequate” effort to find employment.

How Does Alimony Affect Your Taxes?

Alimony payments count as income. If you are receiving alimony payments, you need to report the payments to the IRS and pay income taxes on the money, just as if you were receiving payments from an employer. If you are making alimony payments, you are allowed to deduct the payments from your income taxes. Since that money legally needs to pass to the receiving ex-spouse, the IRS deemed that it should not count as income to the paying ex-spouse.

How Do I Report Alimony for my Taxes?

Reporting alimony on your tax return is a pretty straightforward process. If you are receiving alimony payments, you need to report the total amount you receive as taxable income. This goes on line 11 of your 1040 Form to calculate your total taxable income.

If you are paying alimony, the total amount you pay is taxable deduction. This is an above-the-line deduction that you report on line 31a of your 1040 Form when you go to calculate your taxable income for the year. You will also need to list your ex-spouse’s Social Security Number along with the amount of alimony you’re paying.

 Why is it so Important to Report Alimony?

You are legally required to report your alimony payments to the IRS, just like you are supposed to report your work income. If you don’t and are receiving alimony, you are technically not reporting income for your taxes. If the IRS eventually finds outs, you’d owe the unpaid taxes plus extra penalties and fees.

Paying spouses almost always report because they get a tax deduction. Receiving spouses don’t always report though and the IRS is cracking down. The Treasury Inspector General for Tax Administration has released a report stating that there is a significant discrepancy between the amounts of alimony reported by paying spouses as a deduction and the amounts that receiving spouses are reporting as income. The IRS knows this is an issue and seems to be gearing down on noncompliant taxpayers. Make sure to properly report so you don’t get in trouble.

What is Child Support and How is it Different?

One of the reasons why taxpayers don’t know they have to report alimony for taxes is because it can get confusing when they have to pay child support as well. Child support payments come into play when a divorcing couple has minor children, younger than 18. These are monthly payments designed to pay for raising the kids, usually when one spouse takes care of the children for more time per month than the other.

Like alimony, child support payments are monthly payments set by the divorce agreement. These are also required legally. Generally these payments end when the children turn 18. The big difference between child support and alimony is how they are handled for taxes.

How Are Tax Rules for Child Support Different?

Child support payments do not follow the same rules as alimony for taxes. The receiving spouse does not have to report child support payments as income or pay taxes on child support. On the other hand, the paying spouse cannot deduct child support payments from their income taxes. You can see this is where things get confusing because many just assume the same tax rules apply for both payments when they are in fact different.

How Do You Tell the Difference?

Your divorce agreement should clearly state what part of the monthly payments is alimony and what part of the monthly payments is child support. Generally, payments that are somehow connected to your children are classified as child support. For example, if payments are schedule to stop when the children turn 18, the IRS would most likely classify the payment as child support.

Figuring out the tax laws for alimony can be a little tricky, especially right after you get divorced. However, if you plan right using this information, you should get things under control without too much trouble.

How are Alimony Payments to a Non-US Spouse Reported?

Alimony paid to a non-resident spouse remains deductible. However, applying alimony deduction is much more complicated. The scope of paperwork depends on the Tax Treaty between the United States and the country where alimony receiving spouse resides.

If the Treaty provides exemption to the recipient of the alimony payments received from the U.S. spouse (for example, such exemption exists in the Tax Treaty between the U.S. and Switzerland), then alimony payment can be deducted by the payer even if the foreign spouse does not have a U.S. tax ID number.

If recipient lives in the country that does not have such exemption, then the payor must withhold 30% tax from alimony payment amount and pay to the IRS on behalf of the non-resident spouse. Alternatively, the foreign spouse should obtain a U.S. tax ID number, file form 1040NR (U.S. non-resident tax return), report receipt of the alimony and pay tax themselves.

The first method is not cost effective for the payor (his/her own tax reduction may be less than 30% tax paid for the spouse).  However, the second method is often not feasible in real life.

How does a U.S Person Report Foreign Alimony Payments?

Alimony paid by a non-resident spouse to a U.S. person is income taxable to the U.S. beneficiary (the recipient). If you live in the United States, then this income is reported on form 1040 and is fully taxable.

However, if a U.S. spouse receiving foreign alimony also lives abroad, then most tax treaties provide a special exemption for such payments. They should be taxed only in the resident country and not included in taxable income in any other country. Treaty exemption rules vary for different countries, therefore please consult your tax advisor.

Ines Zemelman, EA
founder of Taxes for Expats