Tax Law and Alimony for Tax Purposes
The federal tax law allows you to deduct the amount of alimony payments you make during the tax year from income. To be deductible, you must have a legal obligation to make the payments and not provide them voluntarily. If you receive alimony, the IRS requires you to include all amounts in taxable income.
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Divorce Agreement
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For alimony to be deductible, the payments must be made pursuant to a valid divorce or separation decree, written separation agreement or court order. The document must expressly state that the payments are made for the support or maintenance of the other spouse.
Alimony Requirements
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The IRS imposes additional requirements you must meet before deducting alimony payments, regardless of how a court, written agreement or decree classifies the payments. You must make all payments in cash or its equivalent, such as a check. If you pay by check, it must be free of any notation indicating the payment is for a purpose other than alimony. The payment of alimony cannot be made by the transfer of property, the grant of rights to the former spouse to exclusively use property, or by any non-cash property settlement. The two former spouses may not live in the same household. Additionally, payments you have an obligation to make beyond the death of the former spouse are not classified as alimony for tax purposes.
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Contingencies
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A requirement to make payments for which the purpose is not expressly designated by the court or an agreement is not deductible alimony if any payment contingency referring to the occurrence of an event in a child's life exists. Examples include payments that cease when a child marries, dies, obtains employment, leaves school or reaches a specified age.
Nonresident Alien
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If the former spouse who receives alimony payments from you is not a citizen or resident of the United States, you may have an obligation to withhold 30 percent from each payment and remit it to the IRS. The purpose of the withholding is to ensure the collection of tax on the spouse's alimony income. However, the United States is a party to numerous tax treaties with foreign countries. Many of the treaties either reduce or eliminate the requirement to withhold federal taxes from citizens and residents of the respective countries. If the former spouse is eligible for a tax treaty benefit, you must reduce or eliminate withholdings accordingly.
Recapture
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You may be subject to alimony recapture if in the third year of making alimony payments, the total amount you pay decreases more than $15,000 from what you pay in the second year. Recapture also applies if the sum of payments you make in both the second and third year significantly decreases in comparison to the total payments you make in the first year. Taxpayers who are subject to alimony recapture must include all or part of the payments made in the three years into taxable income in the third year. The recipient spouse will receive a corresponding deduction for those amounts to reverse the income tax payments made in the previous three years. The purpose of this rule is to eliminate the possibility of the payer spouse disguising payments that otherwise do not qualify as alimony to receive the tax benefit of a deduction.
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