In many marriages, one spouse out-earns the other by a marginal to considerable amount. This is especially true in marriages where one spouse is unemployed, pursuing an educational degree or staying home to raise children. If a couple divorces, the economically disadvantaged spouse may request spousal support or alimony.
In California, family law judges consider a number of factors when determining the amount of alimony a spouse must pay including how long a couple was married or together, the age of both parties, if one spouse is not working and why, and the costs associated with maintaining both individual's current standard of living. In cases where alimony is awarded, there are certain rules with how alimony payments and income are to be treated come tax time.
The Internal Revenue Service allows individuals paying alimony to deduct the total amount of alimony paid in one calendar year from his or her income. Additionally, IRS rules require the individual receiving alimony payments to claim the total amount of payments received from Jan. 1 to Dec. 31 as income. While these rules seem fairly straightforward, the IRS reported that during 2010 alone, there was a $2.3 billion gap in the amount of alimony deductions taken vs. the amount that was claimed as income.
One reason for the significant gap in alimony deductions and reported income likely stems from confusion over how to handle Dec. payments. For example, say the paying spouse pays the Dec. alimony payment on Dec. 30, but the receiving spouse doesn't officially receive the payment until Jan. 1. In this case, the receiving spouse is likely to claim the income for the following calendar year, whereas the paying spouse likely deducted the payment from the previous year.
Unfortunately, the IRS doesn't currently have a system in place to sufficiently deal with confusion over alimony payments. As a result, both paying and receiving exes may unknowingly fail to comply with IRS rules and consequently incur penalties and fines.
In cases where alimony is a factor in a divorce settlement, individuals would be wise to consult with a divorce attorney about the tax rules and potential implications associated with alimony. A divorce attorney can answer questions and provide guidance about how to deduct or claim alimony payments.
Source: Fox Business, "The Tax Rules of Alimony," Bonnie Lee, June 12, 2014California Judicial Branch, "Spousal/Partner Support," 2014