How to treat alimony come tax time

|

When a couple in Tennessee decides to divorce, there are a number of matters that must be sorted out and decided. Assets and property must be divided, matters related to child custody must be sorted out and both individuals must untangle their personal and financial lives from one another. In some divorces, matters related to spousal support or alimony must also be decided.

In many marriages, one spouse out-earns the other spouse. An obvious discrepancy in income may be related to a number of personal and professional decisions. One parent may decide to put his or her career on hold to stay home and raise children or one spouse may decide to go back to school. Whatever the case may be, in divorce cases involving one spouse who is considered "economically disadvantaged," alimony may be awarded.

According to TN.Gov, in the state of Tennessee there are three types of alimony that may be awarded. All types are awarded based on the fact that one spouse has been deemed economically disadvantaged by the court, but each type varies in duration and variability.

Individuals who are involved in divorces where alimony is awarded are required to adhere to certain procedures and laws. Among these laws are those that relate to how alimony should be treated come tax time. Traditionally, individuals who are required to pay an ex-spouse alimony may deduct the annual total amount paid. Likewise, individuals receiving alimony payments are required to claim the total annual amount received as income. However, recent information shows that many alimony payees and receivers fail to abide by IRS alimony laws.

Upon examining some 570,000 2010 tax returns, officials from the Treasury Inspector General for Tax Administration determined that, when it comes to alimony, "deductions exceeded income by more than $2.3 billion." For the IRS, over a five-year period, this so-called "alimony tax gap" equates to an estimated $1.7 billion in lost revenue. Individuals who either fail to claim alimony assets as income or who fail to provide a tax identification number for an alimony recipient, may face fines and penalties.

Many of the rules and procedures related to divorce matters are complex and confusing. For individuals dealing with alimony issues, a divorce attorney can answer questions and provide advice on how to handle assets both paid and received via alimony.

Source: The Wall Street Journal, "The IRS Cracks Down on Alimony," Laura Launders, May 23, 2014TN.gov, "TENNESSEE COMPILATION OF SELECTED LAWS ON CHILDREN, YOUTH AND FAMILIES, 2011 EDITION," 2014

Categories: