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Helton Law Firm, PLLC

Understanding the tax ramifications of alimony

Unfortunately, many Tennessee divorcees misunderstand the tax consequences of alimony payments versus child support payments. Child support is neither taxable income to the recipient nor a taxable deduction for the payor. However, alimony or maintenance is an income tax deduction for the paying party and considered taxable income for the receiving party.

When alimony is a part of the divorce decree or settlement agreement, care must be taken to properly draft the papers and make sure that payments are qualified for a tax deduction by the IRS. Few things can be worse than paying an ex-spouse alimony for a year only to have the IRS disallow the tax deduction.

IRS Publication 504 specifies the requirements for alimony to be allowed as a deduction. First, the payments must be specified as alimony in the decree or property settlement agreement. Though payments can be made to a third party, the ex must consent in writing. Since the payment must be in cash, trading off property for alimony is not sufficient. The decree must also provide that alimony will cease upon the death of the recipient.

At times, the IRS will look to the documents and determine that payments are actually child support rather than alimony. Generally, this issue arises if the payment is tied to any event related to a child. If payments are reduced or eliminated when the child reaches a certain age, leaves the home or becomes employed, the IRS may deem payments to be child support and disqualify the deduction.

When choosing a divorce attorney it is important to select one with knowledge of appropriate tax law. In addition, the operative documents should be double checked to ensure that they meet IRS muster.

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