Alimony and Taxes are two major, yet often overlooked issues in North Carolina Divorce cases. Also called post-separation support or spousal support, alimony is tax deductible to the paying spouse (or ex-spouse), and must be reported as income on the tax return of the receiving spouse. While there is no limit to the amount of alimony you can deduct, you do have to follow some rules to make sure you don’t raise red flags with the IRS. And before I go any further, let me remind you that this is just a general overview of the tax laws regarding alimony. It is not meant to be comprehensive and if you have specific questions about your situation, I suggest you contact a tax lawyer. If you contact my office, I can give you the names of some folks I recommend.
Here are the eligibility rules to be able to call a payment alimony and deduct it on your tax return:
- You must make a payment to a spouse or former spouse under a divorce or separation agreement. In North Carolina, this means that you must be making a payment pursuant to a court order or written separation agreement.
- The payment must be in cash (i.e. check or money order).
- You must not be members of the same household at the time that you make the alimony payments.
- Your spouse or former spouse must include your payments to them on their tax return as income.
- You must pay the alimony within the year that you are taking the deduction.
You can deduct alimony on your return regardless of whether or not you itemize deductions on your tax return. However, you must file a Form 1040 and cannot file a Form 1040A, 1040EZ or 1040NR. You must also include the social security number of your spouse or former spouse or the deduction could be disallowed and you will subject yourself to a financial penalty.
You should be aware that there are a number of payments that are NOT considered alimony. These include:
- Child Support
- Noncash property settlements
- Voluntary payments that are not identified in a divorce or separation agreement as alimony.
- Payments to keep up your own property that your spouse is living in
In addition, you may not deduct the legal fees paid to defend yourself in an alimony suit.
One of the questions I frequent receive from clients is how to handle payments for a jointly owned home. Essentially, if the divorce decree or separation agreement states that you must pay expenses for a home owned jointly by you and your spouse/former spouse, and you must pay all of the mortgage payments, real estate taxes and/or homeowners insurance, then you may be able to deduct a portion of these payments as alimony. How much you can deduct will depend on how the property is titled, and what the actual expenses are that you are required to pay.
Here’s another frequently forgotten little nugget about life insurance, which is typically required to guarantee the payment of alimony if you should die while your obligation to pay alimony is outstanding. If the divorce or separation agreement requires you to pay these premiums, and your spouse owns the policy, then you may be able to deduct those premium payments as alimony.
Circular 230 Disclaimer
IRS regulations require me to advise you that, unless otherwise specifically noted, any federal tax advice in this communication was not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties; furthermore, this communication was not intended or written to support the promotion or marketing of any of the transactions or matters it addresses.