Is Alimony Tax Deductible?

Alimony is a term that comes into picture when one files for a divorce or a separation. It is an amount that is paid by a person to his/her spouse to provide financial support post divorce/legal separation. Alimony payments can include rent, mortgage, utilities, medical costs incurred, etc. Alimony tax is deductible. Alimony is tax deductible from your gross income on the tax returns in the year it is paid. Precisely, alimony is tax deduction for the person who pays the alimony and is included as taxable income for the person who avails the alimony. But in case of child support, the alimony is not taxable to the person who is in charge of the custody of the children.

Let's take an instance to understand how is alimony tax deductible. Ron and Helen are a couple who have recently filed for a divorce. Ron has an annual income of USD 175,000 and Helen, a school teacher by profession, has an annual income of USD 23,000. Helen obviously has a lower tax rate as compared to Ron. So both of them have to understand, how is the alimony tax deductible and how it can benefit them mutually. If Ron claimed to support with alimony, he could not only file for his own income tax returns but also could help Helen by paying her enough to compensate for the extra tax she would have to pay.

Requirements for Alimony

• Alimony payment must be done under a decree of an agreement citing a divorce or a legal separation.
• The agreement citing alimony (tax deductible) benefits, must provide for cash payments (checks or money orders).
• Alimony for child support is not tax deductible. This includes any other payments made for child support.
• An alimony that is tax deductible nullifies if there is an untimely death of the receiving spouse. The alimony tax liability terminates in such a case.
• For alimony to be tax deductible, the couple should not file joint returns with each other.

Temporary and Lump Sum Alimony

Temporary Alimony - Tax Deductible: Temporary alimony is the one which is paid for a short duration of time. These payments are paid usually after a petition for divorce is filed. The temporary alimony is paid by the spouse with higher income to the receiving spouse with a meager income or no income. The payments made in a temporary alimony depend on various factors like receiving spouse's income, secondary sources of income for receiving spouse, tax deductibility on the income of the spouses, medical insurance and union dues. This alimony ensures a financial stability during the highly emotive phase of divorce. The receiving spouse gets the temporary alimony until the court gives its judgment on dissolution of the marriage. But temporary alimony tax is not deductible if the joint returns filed by both the spouses is still valid.

Lump Sum Alimony - Tax Deductible: In many cases, instead of a regular taxable alimony, lump sum alimony is acceptable by a spouse. There is only one financial transaction between the two spouses and that includes all the cash payments and buy-outs. This alternative is better than the regular alimony payment as the receiving spouse does not have to depend on the other spouse all throughout the life. Lump sum alimony is not tax deductible if the lump sum cash transfer happens within a year.

Divorce is an emotional phase in the life of a couple. Hence, IRS excludes legal fees and costs incurred in obtaining divorce from alimony (tax deductible). It also prohibits deduction for costs incurred for personal advice and counseling.