Tax Implications of Alimony Payments
Spousal maintenance payments can be deducted by the party paying them for taxes and are counted as income for the receiving party. Maintenance can be classified as nontaxable and nondeductible if agreed upon in the divorce settlement. Meaning, one party cannot claim the support payments as a tax deduction while the other claims the income as nontaxable.
Receiving Support Payments
If you're seeking support payments from your spouse, you should consider the impact it will have on your taxes. For most people, when you receive income from an employer they withhold taxes from your paycheck, but this is not true of your spouse writing you a support check.
One way to avoid a large tax bill at year's end is to pay your estimated taxes each quarter, in the same way someone who is self-employed might. You could also choose to withhold the additional amount from your paycheck. In the end, however you handle the additional income afforded by maintenance payments is up to you, but taking some sort of action in advance of tax day is generally better than waiting for the bill on April 15.
IMPORTANT: If your spouse pays support by paying your expenses (such as mortgages, car insurance, car payments, student loans, etc) on your behalf, these payments will be treated as income and need to be included on your income taxes.
Paying Spousal Support
If you are the one paying spousal support, these payments can be deducted from your taxable income on your yearly tax return. Remember, this is only true of spousal maintenance, not child support or property division.
The IRS is very picky when it comes to support payments, especially in the first year. They scrutinize the payments to ensure property distributions and other post-divorce expenses are not included as deductible.
IMPORTANT: Agreements calling for larger payments at first and smaller payments later will be scrutinized more thoroughly. At times, the IRS will assume these large upfront payments are in lieu of property or something else. They get particularly aggressive if your agreement calls for a $15,000 reduction or more in support after the first three years.
Another important consideration that should be made when negotiating support payments is ensuring you DO NOT tie the end of the support payments to anything relating to your children (like moving out or finishing college). If audited, the IRS may view the support payments as child support instead, which is not tax deductible.
Finally, even if making payments to third parties and not directly to your spouse (such as mortgage payments, car insurance, car payments, student loans, etc), for the party receiving alimony these payments should be considered payment directly to the alimony recipient. These payments should be included on your income taxes as a deduction.