Certain IRS rules sound rather simple. Here is one: Alimony is deductible and the deduction does not have to be itemized. It is a so-called above-the-line deduction.
As simple as it sounds, the IRS pays close attention and frequently audits this deduction. It matches up a deduction against income, which can be an easy recipe for mismatches especially if you ex-spouse fails to report alimony as income.
What is required to deduct alimony?
If you do not follow these requirements, the IRS might disallow your deduction:
- Explicitly label payments as alimony in the divorce or separation agreement, a lump sum property equalizer is usually not considered alimony
- Make cash payments directly to an ex-spouse rather than a mortgage lender
- There must be a provision that the obligation ends if your ex- dies
- Avoid anything that would make a payment appear to be child support
- Do not live in the same house of file joint 1040s
When do problems arise? In one case, a husband and wife orally agreed on a modification. Because they did not amend the existing court order, the IRS disallowed the husband’s higher deduction for a great amount of alimony than listed in the decree.
Unintended child support
Child support payments to an ex-spouse are not deductible. If not careful, the IRS could disallow a deduction by characterizing it deemed child support payments. How can you spot something that might be deemed child support? If the age of a child or completion of school triggers some change in the amount paid, it could appear to be child support.
An alimony award that decreases from $3,500 to $2,000 when a child reaches age 18 could pose problems. In this example, only $1,500 of each month payment is deductible, because a portion of the payment is deemed child support.
While many divorce attorneys are aware of general tax rules, this is not the main area of their focus. It is often a good idea to seek a consultation with a tax attorney before issues arise down the road in an audit. If you are at the audit stage based on a past mistake, get immediate counsel on how to resolve the tax problem.
