Alimony and Tax Implications

Alimony is support paid after a divorce has finalized. Alimony is deductible from the party paying alimony and taxed as income to the party receiving it if it meets certain requirements established by the Internal Revenue Service. For starters, you need to make sure the specific terms of your alimony award are spelled out in a settlement agreement or court order. Second, alimony is intended to be a cash payment. There is some flexibility here however in that payments of bills on behalf of the recipient are still treated as “cash” payments to the recipient. For example, alimony can consist of payments to upkeep a property such as mortgage payments, taxes and insurance though only half of the payments would be deductible.

Alimony can include payments to a third party if designated that it is in lieu of alimony. Additionally, alimony can consist of payment of life insurance premiums for the other party. It is important to note that the parties cannot file a joint return when alimony is being paid and should not be residing in the same household. Finally, alimony must terminate upon the death of the receiving party so any payments required after death would not count as alimony. Child support, noncash property settlement, and payments on the property of the partying paying alimony or use of that party’s property do not count as alimony. Alimony can be direct pay to the recipient or via wage garnishment through Domestic Relations. The method of payment has no bearing on the tax implications for the parties.