Alimony and its effect on taxes

When a couple decides to get married, they often intermix their finances, meaning that each person has access to the other’s income and resources. However, when people decide to get divorced, this financial support system comes to an end. For an individual with a stable career, this might not be a huge issue. However, if one spouse stayed at home, to take care of children, for example, then the financial loss can be devastating.

In order to ensure that a divorce does not leave one spouse destitute, a family law court will often order that one spouse pay alimony, also known as spousal support, to the other spouse. These payments may only last for a short period of time or they may be indefinite, depending on the situation.

While alimony can be an important source of income for some divorced people, it can also have complicated tax implications. People need to understand how alimony will be treated by the IRS to avoid further financial complications.

First, those receiving alimony need to understand that it is considered income for tax purposes. Therefore, it needs to be reported on an individual’s tax forms as such. This means that the person receiving the money will pay taxes on it.

On the other hand, the person paying alimony can deduct the amounts paid from his or her income. This deduction, however, is only allowed if payments are:

• made according to a divorce decree
• paid in cash
• not treated as child support
• end upon the death of recipient

Additionally, the divorce decree must not say that the payments are not alimony and the couple must file separate tax returns.

Alimony is just one of many complicated divorce issues. Arkansas residents need to understand these complexities and should therefore consult with a qualified family law attorney to ensure that they are fully protecting themselves and their future.

Source: FindLaw, “Alimony and Taxes,” accessed Sept. 6, 2015