Exes and Taxes
Alimony payments have tax implications for both parting spouses.
The spouse making the payments-alimony, family support, separate maintenance payments, and spousal support-may deduct those payments when determining gross taxable income. For the spouse receiving payments, the payments are taxable income in the year they are received. Obviously, this is not the case in states that do not impose an income tax. In those states, support payments made cannot be tax-deductible expenses and support payments received will most likely be only subject to possible federal income tax. (Worth noting: This is not the case with child support!) To qualify for the deduction, support payers must comply with the following IRS requirements :
- The payment must be made in cash, check, or money order payable on demand.
- The payment must be made under either a divorce or separation instrument.
- This would either be a court order, a divorce or separation decree, a written instrument which is incident to such a decree, or a decree which requires a spouse to make payments for the other spouse's support or maintenance. OR
- This would be a written separation agreement between a husband and wife who are living apart. Periodic payments are required because of the marital or family relationship (whether or not the agreement is a legally enforceable instrument).
- The spouses cannot file a joint income tax return.
- The written instrument or agreement must not provide for other tax treatment.
- The payer has no liability to continue to make payment after the death of the other spouse.
Unlike most paychecks, alimony checks do not have taxes withheld. As a result, it is up to the recipient to plan ahead: either increase withholdings taken from another source (the support recipient's paycheck) or make estimated payments to the IRS. If neither is done, the recipient will be in for an unpleasant surprise when tax time rolls around.
And finally, recipients of alimony cannot file federal short forms, 1040A or 1040EZ, since alimony is not a line item on either of those returns. They must file on the more detailed form IRS 1040 to show that income.
Before anyone agrees with a former spouse on the type and amount of alimony, it is essential that they talk with a CPA about the tax ramifications. As with most legal issues, spending a few dollars on professional advice can save many, many more dollars down the road.
A Word About Medical Insurance
The supported spouse probably depended upon the other spouse for health insurance during the marriage. If so, and if the supported spouse does not have sufficient means to obtain such insurance, the court may require the paying spouse to continue to provide medical insurance. Or?the amount of alimony or property settlement can be increased to give the supported spouse the ability to purchase the insurance on his or her own.
It should be noted that an employer-sponsored group health insurance plan can be required under Federal law (COBRA) to offer continuation of benefits at the group insurance rates to the supported spouse for up to three years after the marriage has ended.
Stock Options
In some states, stock options constitute income and are eligible for alimony awards. Difficult to value and fertile ground for tax headaches, stock options complicate things a great deal. This is another scenario that calls for professional advice. An expert who specializes in divorce problems, a CPA, or tax lawyer are all professionals who can shed light on the complexities of stock options in a divorce-and are well worth the expense.
. Questions of a Do It Yourself nature should be submitted our "