Ronald Reagan once said: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
His statement is kind of tragically funny because it’s true. So much of our everyday lives are taxed to the hilt.
This taxing, unfortunately, includes alimony. Yep, the goverment taxes alimony payments.
The government sees alimony as income, which makes a bit of sense when you think about it. If alimony weren’t paid out, it would count as income to the spouse who made the money. So, really, the tax payment is transferring from the spouse who pays alimony to the spouse who receives alimony.
Makes sense but still sucks because alimony (along with child support) is often the only source of income someone has after they get divorced. In any case, it is what it is.
What the IRS Says about Alimony and Taxes
The IRS has some guidelines about alimony and taxes (I’m going to quote from IRS Topic 452 — Alimony Paid). It sets out the requirements for something to be considered alimony:
“Amounts paid under divorce or separate maintenance decrees or written separation agreements entered into between you and your spouse or former spouse are considered alimony for federal tax purposes if:
- You and your spouse or former spouse do not file a joint return with each other
- You pay in cash (including checks or money orders)
- The payment is received by (or on behalf of) your spouse or former spouse
- The divorce or separate maintenance decree or written separation agreement does not say the payment is not alimony
- If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment
- You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse, and
- Your payment is not treated as child support or a property settlement”
And here are some things not considered alimony:
“Not all payments under a divorce or separation instrument are alimony. Alimony does not include:
- Child support
- Noncash property settlements
- Payments that are your spouse’s part of community property income
- Payments to keep up the payer’s property, or
- Use of the payer’s property
Child support is never deductible. If your decree of divorce or separate maintenance provides for alimony and child support, and you pay less than the total required, the payments apply first to child support. Any remaining amount is considered alimony.
Noncash property settlements, whether in a lump sum or installments, do not qualify as alimony.
Voluntary payments (that is, payments not required by a divorce decree or separation instrument) do not qualify as alimony.”
How much you end up paying in tax on alimony received will depend on overall income at the end of the year. You’ll need to see an accountant to figure out exact numbers so you can plan.
In the end: (1) the person receiving alimony will pay taxes on alimony, (2) the person paying alimony will receive a tax deduction for alimony paid, (3) property settlements and child support are never considered alimony, and (4) you cannot change any of this by writing in your divorce decree that alimony will not be taxed (nice try, but the IRS doesn’t take too kindly to people trying to rewrite the tax code on their own).
Finally, if you would like to read more of what the IRS has to say on divorce and taxes, read here.