Is Alimony Taxable or Tax Deductible?

When a divorce is finalized, in the state of Florida, one spouse may begin receiving alimony as a means to ensure he or she is financially cared for after this life changing event. However, alimony can greatly affect you when it is time to file your tax return. This is something people may not think about during the divorce proceedings. Now that tax season is here, it is time to look at how alimony is going to affect the tax situation for both parties.

Both parties have to report alimony on their tax returns. The party who is paying alimony can report it as a tax deduction. The party receiving alimony must report it as additional taxable income. An example:

• A woman pays her ex-husband $1,000 every month for alimony. This results in her paying $12,000 per year. Her yearly income is a total of $70,000. After claiming the alimony as a deduction, her taxable income is reduced to $58,000.
•Meanwhile her ex-husband has a yearly income of $40,000. His taxable income will be $52,000 after he includes the alimony payments.

Tax Information Regarding Lump Sum Alimony Payments

The above example reflects a case in which alimony is being paid out over time. But, what about when alimony is paid as a one-time lump sum? Instead of paying alimony totaling $48,000 over the course of 4 years, instead a lump sum of $48,000 may be paid all at once. Generally, the same rules are going to apply. The person who pays the lump sum will claim it as a deduction and the person who receives it will report it as taxable income.

No matter what type of alimony a person receives, the addition and subtraction of income due to alimony results in one person lowering their taxable income and the other person increasing their taxable income. If you are the party receiving alimony, you may wind up getting taxed at a higher rate due to the addition of these funds into your total income.

The IRS Recapture Rule

This IRS rule is a way to ensure that one spouse is not trying to hide property settlements as alimony, because property settlements are not tax deductible. Also, the recapture rule ensures that alimony payments do not allow one party to get an improper tax break. This can be seen when one party tries to pay off their alimony obligation faster by paying more in one year than is required.
Here is how the rule works:

• There is a three-year review of these funds
• If the alimony paid Year 2 is more than $15,000 greater than what was paid in Year 3, then the ex-spouse who is paying the alimony will pay taxes on the amount that exceeds the $15,000 during Year 3.
• If the alimony paid in Year 1is at least $15,000 greater than what was paid in the Year 2 and Year 3, then the excess will be considered income for the spouse receiving the money.

There are exceptions to this rule that spouses need to be aware of, and this is where Wendy Norman can help. These exceptions can be highly case-specific, so in this case it is best to work with a Florida divorce attorney who has experience in these situations, as Wendy Norman does.

If you’re in the Jacksonville Florida area, feel free to reach out to our office to request a free consultation at: 904.306.9926.