How Do Alimony Payments Affect Your Tax Status?
After 20 years of marriage, you and your spouse have decided to part ways. You know that he has strong financial holdings and you’ve only worked on and off while raising your family. Your prospects for finding a well-paying job aren’t the best. When the court considers all of these factors, you feel that you have a good chance of getting a permanent alimony settlement.
Over the years, your ex handled the finances and paid the taxes. However, now as a single person, you need to think about the potential tax impact if the court awards you permanent alimony. So, what do you need to know when it comes to your income tax liability on your alimony payments?
First and foremost, the Internal Revenue Service (IRS) considers alimony payments as taxable income. Depending on the terms of your settlement, cash payments made by your ex to a third party on your behalf may be taxable. This includes payments for your medical expenses, housing costs (rent and utilities), taxes and tuition. Also, if you must pay:
- Expenses for a home owned by you and your ex, some of your payments may be alimony
- All the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony
- All the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony
As you might expect, it can be overwhelming to try to decipher the multitude of IRS rules and exceptions in deciding how to tax your alimony payments. Reach out to a divorce attorney who also has the financial savvy to develop a successful tax plan to best protect your assets.