Tax Implications of Alimony in Wisconsin
Alimony is taxable income for the recipient and alimony is a tax deduction for the payor in all circumstances except if you and your spouse file a joint tax return with each other.
Whether paying or receiving alimony payments there are tax implications you should know. Alimony is taxable income for the person receiving the payments and a tax deduction for the person paying. (Child support, unlike alimony, is neither taxable or tax deductible.)
There are instances where alimony can be classified as nontaxable and nondeductible. Either way, alimony is set up so both parties need to classify the support payments the same way. In other words, one person can't claim the alimony payments as a tax deduction, while the other spouse claims the income as nontaxable.
Receiving Support Payments
There are some tax implications one needs to consider if they are receiving alimony. When you get paid from an employer, they withhold taxes for you, however, your spouse will not when writing the support checks. Therefore you'll need to withhold taxes from alimony checks yourself.
One way to ensure this remains manageable is paying estimated taxes each quarter. This helps avoid a large tax bill at years end. Another option is to increase the withholding amount from your paycheck. However you handle the additional income is up to you, but taking action is better than waiting for the bill on April 15th when you file taxes.
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 pay alimony, these payments can be deducted from your taxable income on your yearly tax return. This is only for alimony payments; child support and property distribution are not tax-deductible.
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. The IRS at times 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 date of your 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.
REMEMBER: When making payments to third parties (such as mortgage payments, car insurance, car payments, student loans, etc) for the party receiving alimony these payments should be considered direct payments to them. These payments should, therefore, be included on your income taxes as a deduction.
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