The likelihood of making sound financial determinations in a divorce rather than emotional decisions can be greatly increased with the help of a proven divorce attorney who has the expertise to protect your financial future.
Alimony, or spousal maintenance/support, is a case in point, and an element in some divorces that is not well or fully understood by the concerned parties.
Child support and property settlements do not qualify as alimony, for example, and are not deductible under tax laws for the payer or non-taxable to the recipient. The Internal Revenue Code treats alimony by a federal standard, and is not governed by court orders or divorce agreements.
If you receive alimony, this means that you must report the full amount on your income tax return each year. Since the payer also reports the amount as a deduction and must include the recipient’s Social Security number, it is simple to detect whether the recipient is reporting the correct amount.
Another important point to consider is the timing in which the alimony payment is made. For the payment to be considered for income tax purposes, it must be preceded by a written separation agreement or a divorce decree. Without the properly filed legal documents, any payment or receipt of money cannot be considered as alimony on an income tax return.
There are options to traditional alimony payments in most states. A lump sum payment in lieu of alimony is, many times, preferred by both parties in the divorce. However, the tax implications of an up-front payment should be considered carefully with a sound financial management plan in place.
Source: Forbes, “Seven key things women need to know about the tax implications of alimony payments” Nov. 30, 2011