Print Posted by CPA on the Square on 09/06/2017

Avoid Alimony Tax Traps

Avoid Alimony Tax Traps

It’s true “cash is king”, but how that cash comes in and goes out is important for your client.  Depending on your role in the divorce, you may see alimony as a benefit or a disadvantage to your client. 

If your client is responsible for alimony, the payments are generally deducted from the taxpayer’s gross income, reducing the Adjusted Gross Income.  This lowers the amount of tax due, and may qualify your client for additional credits or deductions they might otherwise not be eligible for. Also, judges often consider it to be rehabilitative.  That is, it is meant to be a temporary payment until the recipient can acquire the education and experience to replace the lost income. That means it can end in a much shorter period of time than child support for young children.

If you’re on the receiving end, alimony becomes an income source, and generally speaking, your client is being taxed at a lower rate than their ex-spouse.  While it is taxable, it is usually easier to get an ex to pay alimony, since the term is often shorter than child support.  However, if you are working another job, you will need to either withhold more taxes out of your paycheck or make estimated tax payments to avoid a big bill come April 15th

Child support is not tax deductible to the payor, nor included in the income of the recipient.  However, the spouse making the payments may be able to claim the children as dependents for tax purposes if he or she is paying 50% or more of the support of the child.

Sounds pretty simple, doesn’t it.  Except that alimony can sometimes be reclassified as child support, and that means paying taxes on money you’ve already paid out.

Alimony Recapture

Why or when would you need to recapture alimony paid out?  If your alimony is reduced or ended before the 3-year period, starting with the first payment.

Why would this happen?

  • Change in divorce/separation agreement
  • Failure to make timely payments
  • Reduction in your ability to provide support
  • Reduction in spouse’s support needs

Recapture Rule

If your alimony payments decrease or end during the first three calendar years, you may be subject to the recapture rule. If you are subject to this rule, you have to include, in income, in the third-year part of the alimony payments you previously deducted. Your spouse can also deduct in the third-year part of the alimony payments he or she previously included in income.

The 3-year period starts with the first calendar year you make a payment qualifying as alimony, under a decree of divorce or separate maintenance or a written separation agreement. Don’t include any time in which payments were being made under temporary support orders. The second and third years are the next 2 calendar years, whether or not payments are made during those years.

When the Recapture Rule Doesn’t Apply  

If the spouse receiving alimony dies or remarries, there is no recapture.  A change in the receiving spouse’s marital or living status negates the rule.

Additionally, if the change is due to a difference in payments made under a temporary support order, those payments aren’t included as alimony for purposes of recapture. 

Another exception is if the change is because the payments are made as a fixed part of your income from a business or property, or from employment or self-employment.  In other words, if the change is due to the paying spouse’s income varying normally, there is no need for recapture.

“But I want to be able to deduct my child support as alimony! Can’t I do that if my spouse agrees?”  In a word, no.  If there is a reduction in alimony due to a change in the child’s situation, whether that be marriage, death, attaining the age of majority, earning a certain level of income, etc, that changes the amount of alimony being paid, that amount is considered to be child support, and must be recaptured as income by the payor. These rules are called the child contingency rules, and fall under section 71 (c)(2) of the Internal Revenue Code.

Basically, alimony is defined by the IRS as payments made to an ex-spouse that are not divisions of property, are not child support, does not continue beyond the death of the receiving spouse, and are not designated as “not alimony” in the divorce decree.  The IRS takes a very grim view of people trying to disguise child support as alimony in an effort to lower their tax burden, so careful planning must be done to stay in the good graces of our federal government.

For more information regarding these complex rules, you can read IRS Publication 504, Divorced or Separated Individuals.  For questions or a more detailed explanation, please consult your favorite tax accountant.


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Bruce Levine, CPA provides outstanding service to his clients because of his dedication to the three underlying principles of professionalism, responsiveness and quality.  Bruce will answer all of your questions, as they impact both your tax and financial situations.  For more information visit him at  http://www.cpaonthesquare.com.


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