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Don't let alimony lead to a tax audit

When negotiating a divorce settlement in Tennessee, it is critical to consider all relevant tax implications. Different pieces of marital property and support carry different tax liabilities. It is important to avoid unknowingly ending up with the short end of the stick due to taxes. Alimony, for example, has significant tax implications.

If you pay alimony to a former spouse, you may deduct this from your income when preparing your tax return. This can have a direct effect on the total amount of income tax you are obligated to pay. In turn, if you receive alimony payments you have to claim these as income for tax purposes--and this essentially means that you pay income tax on alimony received. Equipped with this knowledge, divorcing spouses may change their minds about alimony preferences.

The Treasury Inspector General for Tax Administration recently reported that a number of people are failing to properly report alimony on their tax returns. In 2010, about half of the tax returns that claimed alimony deductions could not be linked to a corresponding tax return that reported the alimony as income. In 2010 alone this added up to a $2.3 billion discrepancy. The widespread failure to properly report alimony could cost the government $1.7 billion over about five years.

Alimony deductions of a certain dollar amount are likely to be audited by the IRS. TIGTA has now requested that the IRS send out warning letters to other taxpayers regarding possible alimony errors. The IRS has not yet confirmed whether it will send out the letters, but it has said it is working on improving screening processes in order to catch alimony mistakes or fraud.

TIGTA's discovery of this problem is an important reminder that those who are going through a divorce need to fully understand their property division and spousal support options, and this includes tax obligations.

Source: Forbes, "Alimony Tax Gap is $1.7 Billion," Ashlea Ebeling, May 15, 2014