Spousal Support As a Tax Deduction
The breakup of a marriage has many side effects. The two parties are no longer associated in a legal sense once the divorce decree is final, yet there are residual agreements that will continue to affect the finances of both. Spousal support, or alimony, is one of these issues. The monies that are paid to a spouse after the dissolution of the marriage have certain tax implications, including how these alimony payments are claimed as tax deductions.
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Legal Aspects of Tax Deductions and Alimony
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According to the website legalmatch.com, certain conditions must be met before spousal support becomes an issue, either as a tax deduction or income. Federal law mandates that the marriage must be dissolved by a court order, such as a divorce decree or a legal separation, before any alimony payments can be claimed as a tax deduction. Payments must be in cash before they affect either party's tax status, and these payments must have been deemed strictly for spousal support as opposed to child support or property settlements. Additionally, the parties must be living in separate residences for alimony payments to be claimed as a tax deduction or taxable income.
Alimony Amounts and Tax Deductions
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The federal government instituted changes in the tax laws concerning spousal support amounts. Congress mandated these changes---likely in response to certain abuses or overpayments in the form of property settlements to gain tax deduction advantages---in the Tax Reform Act of 1984. These overpayments, referred to as "excess alimony" in the legislation, addressed alimony payments within the three years immediately following the divorce decree. The first two years are especially the focus of this bill, reflected in the ordering of what is known as a recapture of excess spousal support if it surpasses federal guidelines. This recaptured money must then be claimed on the paying spouse's taxes as income.
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Other Aspects Related to Federal Laws
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Another way in which the IRS has attempted to prevent abuses of tax deductions in divorce settlements is by creating the "Child Contingency Rule" in those cases where child support was part of a divorce decree. Some people had changed the arrangement of spousal and child support payments from the original settlement terms by combining both payments in order to increase the amount of their tax deduction. This IRS ruling states that any reduction in spousal support that is converted to child support results in a retroactive reduction, thereby reducing the original amount of tax deduction allowed.
Requirements That Apply to Tax Deductions
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There are definite requirements that must be met in order for alimony payments to be claimed as a tax deduction. First, they must be made in regular, periodic payments to be considered spousal support, rather than a gift. Secondly, there must be a written record that proves the supporting spouse has made a payment for the specific purpose of alimony. Additionally, the paying spouse must make the payments directly to the receiving spouse, not through an intermediary, and the receiving spouse must claim them as income on his or her taxes. The paying spouse can address these issues by making payments by check or money order and writing the recipient's name as well as "alimony" or "spousal support" on the check.
Other Issues
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Alimony payments do not necessarily have to be itemized, as most deductions do, to qualify as a legitimate tax deduction. As long as the payments are clearly distinguished as being for the purpose of spousal support, they will be allowed. Partial payments that are for both spousal and child support will be allocated first as nondeductible expenses until the full payment is paid according to the divorce settlement terms.The spouse receiving the support must provide his or her Social Security number to the paying spouse for inclusion on the paying spouse's tax form before the IRS will allow the tax deduction.
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References
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