Roughly 50 percent of marriages today end in divorce. And, many of those divorces involve spousal support or alimony. Presently, the law allows the party paying the spousal support to claim a tax deduction for the amounts paid. However, it’s important for payers to understand the intricacies of the tax law surrounding this tax benefit.
What is Spousal Support?
As a result of the split up of a marriage, one party (known as the payer) can be left with the responsibility of paying the other party (known as the recipient) income for a certain amount of time. This is commonly called alimony-or spousal support as it’s known today. In many cases, the amount of spousal support is decided by the court and stipulated in a divorce or separation decree.
Under the law, the recipient must report the spousal support as income and the payer can, in turn, receive a tax deduction for the amount paid.
However, in order to obtain the spousal support tax deduction, the payer must follow the intricacies of the U.S. tax code. Unfortunately, due to the complex nature of tax law, claiming a spousal support tax deduction is much easier said than done; many may not think a few simply actions will affect the ability to claim the deduction.
Following a few basic principles will help the payer avoid an audit and legally claim the deduction.
Do not file a joint tax return: Some couples have filed joint tax returns together for years and may continue shortly after their divorce or separation. However, it’s important for a payer to file a separate tax return (called a 1040) from his or her ex-spouse to reap the benefits of the spousal support tax deduction for the year.
Live separately: For various reasons, some couples choosing to legally split continue living under the same roof. However, if the payer wishes to deduct all spousal support amounts on his or her tax return, the couple must be living separately. Otherwise shared expenses like the heating or electric bills could reduce the amount the payer can deduct from his or her taxable income.
Deduct only payments pursuant to the decree: Any spousal support paid to an ex-spouse that is above and beyond what’s stipulated within a divorce or separation agreement cannot be tax deductible. The IRS will only allow amounts documented to be deducted.
Pay with cash, not property: Under the law, in order to claim the deduction, the payer can only pay in cash or cash equivalent like a check or money order to an ex-spouse. Paying with property like jewelry or a car cannot be deducted as spousal support.
Additionally, a payer cannot deduct as spousal support any benefit provided by the payer to the ex-spouse. For instance, if a payer owns a house (and pays the mortgage, property taxes, insurance, etc.) and allows the ex-spouse to live there rent-free, the payer cannot deduct the benefit conferred by the ex-spouse as a spousal deduction.
However, a payer can pay cash directly to a third party the ex-spouse owes so long as it’s stipulated within the divorce or separation agreement or via written request of the ex-spouse. For instance, the payer can pay the ex-spouse’s mortgage or medical bills or even life insurance premiums owned by the ex-spouse in lieu of collecting a direct payment of spousal support. This still counts as a spousal support payment so long as it’s a cash or cash equivalent payment.
Do not deduct joint child and spousal support payments: Unfortunately many payers simply cut one check to the ex-spouse that includes both the child support and the spousal support. Since only spousal support is tax deductible, the payer cannot deduct the entire amount and has to determine how much of the lump sum is actual spousal support that can be deducted. In some cases, the decree stipulates separately how much spousal support and how much child support is to be paid. However, a payer is encouraged to consult with the IRS website for additional clarification on this.
Prospective Divorce
These recommendations are not simply for individuals who have already secured a divorce or legal separation; couples who see the potential for divorce or separation and foresee spousal support as part of the decree can also benefit by following the tips.
However, consulting with a divorce attorney and determining the exact benefits and requirements as they relate to your particular situation is advised.