Simply stated, alimony is the transfer of money between divorced, or divorcing, spouses. The transfer usually results in the paying spouse reducing taxable income and the receiving spouse increasing taxable income. Child support and property transfers between divorcing, or divorced, spouses are not alimony, so they neither reduce taxable income for the payer, nor increase taxable income to the recipient.
There are eight requirements for money transfers between former spouses to be considered alimony for tax purposes. All eight must be met.
1. Payments must be made pursuant to a written divorce decree or decree of separation.
2. Divorced spouses cannot live in the same household after the divorce or legal separation is final.
3. Payments must be in cash or cash equivalents – e.g. check, money order or payroll deduction.
4. Payments must be made to or on behalf of the ex-spouse.
5. Divorce or separation decree cannot state that payments are not alimony for tax purposes.
6. A married filing joint-status tax return cannot be filed.
7. The obligation to make nondelinquent payments cannot survive the death of the recipient spouse.
8. Payment cannot be called child support in the written agreement nor be deemed child support.
Pendente lite payments must meet all of the same eight requirements to be deductible alimony for the payer and taxable alimony for the recipient.
And let’s not forget alimony recapture. Recapture means that the payer who tax deducted the alimony has to include as income, in a subsequent year, all of the applicable amounts, while the recipient spouse gets to deduct all of the same amounts in the subsequent year. Recapture occurs when alimony payments decrease significantly between the first and second post-divorce year, and or between the second and third post-divorce year. Significant decreases in alimony between the first and second, and the second and third years, are essentially amounts in excess of $15,000. The recapture of previously deducted alimony takes place in the third post-divorce year. The computation is complicated, so the parties should seek the help of a CPA, or other qualified tax preparer. There are exceptions to the recapture rule, such as the payments were made under a temporary order of support, the payments are a fixed percentage of income that fluctuates annually, or the payments terminated due to the death or remarriage of the recipient. And thus, if all is complied with, alimony is tax deductible.
Marshall A. Morris, CPA, ABV, CFF is an experienced forensic accountant providing investigative accounting and business valuation services for collaborative divorce matters. Marshall has lectured at Rutgers University, The New Jersey Society of Certified Public Accountants, and Bar Associations, and has authored numerous topical articles. Marshall is Past Chair of the CPA Society’s Valuation Services Interest Group and Past Chair of the Matrimonial Accounting Interest Group. He is also a member of the American Institute of Certified Public Accountants’ Forensic and Valuation Section. Marshall is a New Jersey R.1:40 qualified mediator, and a qualified member of the Collaborative Divorce Professionals and the New Jersey Collaborative Law Group. With offices in Old Bridge New Jersey, he can be reached at 732.588.5559, or by email at firstname.lastname@example.org. Marshall invites you to visit his website www.marshallmorriscpa.com.