How Should Alimony Payments Be Treated for Tax Purposes?

If you have been court ordered to pay alimony, or if you are on the receiving end of those payments, there are two questions that you will want to familiarize yourself with.

For the payer, is that alimony deductible, and for the recipient, do you have to claim it on your tax return?

By IRS definition, alimony is a payment made to a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are made absent a decree requiring them.

In order to be considered a valid instrument for the purposes of alimony, the amount to be paid must be established in writing and signed by each party involved in the maintenance agreement. A divorce decree, a formal separation agreement, or any court ordered agreement that is either interlocutory (not final), or pendente lite (awaiting action on the final decree or agreement) qualifies as alimony.

Certain payments are not considered alimony and cannot be included as a deductible expense. Conversely, they do not have to be included in income either. These expenses include:

* Child support payments

* Property settlements that involve transfer of ownership only; in other words, non-cash transactions

* Payments for the sole purpose of keeping up the spouse's property or for use of that property

Payments do not have to be made directly to your spouse or ex-spouse in order to qualify as alimony payments. Some payments made to third parties represent a portion of the required alimony. Examples of these payments include expenses paid for your spouse's medical costs, housing costs like rent or a mortgage payment, property taxes, tuition and life insurance payments.

If you and your spouse or ex-spouse are still jointly titled to a home, and you are ordered to pay all of the mortgage and tax bills for that home, you can deduct up to one-half of the expense. If you also itemize your deductions and are able to claim your mortgage interest paid, the same rule applies. You can deduct half of the interest paid on the loan.

Your spouse would then take the other half of the interest deduction, if he or she chooses, and would also include in alimony only one-half of the amount paid toward the property, since you are deducting the other half from your taxable income.

If you make a payment to a spouse that is still living in the same household with you, even if it is considered alimony by all other definitions, then neither party can deduct the expense and neither party should include the alimony as income. This applies even if you have physically separated yourself from your spouse within the same home.

A deduction for alimony is allowed, whether you choose to itemize your deductions or not. Alimony deductions are not considered Schedule-A deductions for the purposes of itemizing. Enter the amount of alimony you paid on Form 1040, line 31a. In the space provided on line 31b, you must enter your spouse's social security number for verification purposes. If you do not, your deduction will be disallowed.

Alimony should be reported as income on Form 1040, line 11. Since federal taxes are not withheld from alimony, you will need to consider setting aside a portion to cover any tax liability, or look into making estimated tax payments to the IRS.

For more information, see IRS Publication 504 Divorced or Separated Individuals.

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