Tax Consequences of Alimony in NJ
Alimony is the money that one spouse pays to another spouse after divorce or separation. Alimony is different and does not include child support, which may also be given upon separation from one spouse to another. Federal and state law allows alimony to be deducted by the payor and reportable as income by the recipient, if certain criteria are met.
In order to be considered alimony for federal tax purposes, the IRS requires you to meet seven requirements:
- You and your spouse or former spouse do not file a joint return with each other
- You pay in cash (including checks or money orders)
- The payment is received by (or on behalf of) your spouse or former spouse
- The divorce or separate maintenance decree or written separation agreement does not say the payment is not alimony
- If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment
- You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse
- Your payment is not treated as child support or a property settlement
You must file separate tax returns to consider the payment alimony.
The value of any property given to your spouse does not constitute alimony for federal tax purposes.
The IRS is clear that only money that is characterized as alimony in the separation document is included in its definition of alimony.
You must be physically separated from your spouse in order for payments to be considered alimony.
The marital settlement agreement (divorce judgment) must state that if the recipient dies, the alimony obligation ends.
Child support payments are treated very differently than alimony payments for tax purposes, so be sure that the payments you are treating as alimony are not tied to any type of child support. Similarly, the division of marital property is not tax deductible, so those payments must be kept separate as well.
In general, the payor of alimony will deduct the alimony payment on his or her tax return, which is balanced by the recipient of the money reporting the alimony received as taxable income.
When alimony is awarded to a spouse, it is usually because that spouse has less income than the other spouse. For tax purposes, a person with a higher income benefits from being able to make tax deductions because it reduces the amount of taxes that they owe. If alimony payments are tax deductible, the paying spouse will lower his or her tax bill. On the other hand, the recipient of the alimony typically has a lower income and the addition of the alimony payments does not increase the taxes owed significantly, although the taxes due will usually increase.
Since the tax implications of a divorce are unique to each person, you should speak with the Law Offices of Peter Van Aulen. Call (201) 845-7400 for a free consultation.Sources
IRS Publication 17 – Alimony
IRS Topic 452 – Alimony Paid