If you are newly divorced or going through a divorce, you may be unsure how the Internal Revenue Service treats spousal support for tax purposes. Many people do not think about taxes until tax time rolls around. Of course, it is wise to be prepared on this issue, as receiving (or paying) spousal support will affect your tax bill and potentially lead to an underpayment that you will need to make up by April 15.
The Internal Revenue Service (IRS) treat spousal support, also called “alimony,” as income for federal tax purposes. The most important issue is what qualifies as alimony under federal tax law.
Alimony payments must meet all of the following qualifications:
- The parties do not file a joint return.
- The payments are made in cash, by check, or by money order.
- The payment is received either by the ex-spouse or on that person’s behalf.
- Neither the parties’ separation agreement nor a court decree says that the payment is not spousal support.
- The responsibility to make the payments stops when the ex-spouse dies or remarries.
- The payment is neither child support nor part of the parties’ property settlement.
The IRS specifically provides that the following do not qualify as alimony:
- child support;
- property settlements that are not made in cash;
- payments that are intended to be a spouse’s share of community property income; and
- payments made either to keep up or for the use of the paying spouse’s property.
The former spouse who receives the payments is required to report alimony as income for federal tax purposes. Likewise, the former spouse who makes alimony payments is entitled to a deduction for payments made.
Those who receive payments are required by law to cooperate by providing their Social Security number to the paying party. If receiving spouses do not do this, they may receive a $50 penalty. A party making the payments could not only receive a $50 penalty for failing to include the recipient’s Social Security number but also could see his or her income tax deduction disallowed.
Here are a few trickier situations that require competent financial or legal advice:
- payments made to a third-party under a separation agreement, a divorce decree, or at the written request of the receiving party;
- payments for life insurance premiums for the benefit of the receiving spouse, if they are required by court order or a written separation agreement; and
- certain mortgage, real estate tax, or house insurance payments.
If you are not sure whether to claim alimony as income or a deduction, you should consult with an experienced California lawyer. The attorneys at the Law Offices of Judy L. Burger
will provide authoritative legal support tailored to your specific situation. Make the call today to learn how our attorneys can help: (415) 293-8314.
If you anticipate that your divorce will be final during the 2016 calendar year, you need to start thinking about changes in your federal tax status. Of course, one of the most obvious changes is that you will no longer be eligible to file as “married,” either jointly or separately. Your filing status can significantly impact your tax liabilities. However, child dependency exemptions also affect your taxable bottom line.
The Internal Revenue Service (IRS) only allows one parent to claim an exemption for each child during each tax year. Most of the time, the custodial parent has the right to claim the child dependency exemption. That is because one of the requirements for the exemption, known as the “residency requirement,” mandates that the child live with the taxpayer for more than half of the year.
Here are the other requirements:
- The child must meet a relationship test. Sons, daughters, and stepchildren all meet this requirement.
- The child must meet an age test. This generally means that the child must be either under the age of 19 and younger than you are, under the age of 24 and a student, or permanently and totally disabled.
- The child cannot have provided more than half of his or her annual needs for support.
- The child must not be filing a joint return.
Special rules apply that may allow a noncustodial parent to claim a child dependency exemption. From a very basic standpoint, this exception applies when the parents are divorced or legally separated and formally agree to the change. However, there are other requirements before this shift may be made, and it is wise to consult with your accountant or tax lawyer to protect yourself if you decide to do this.
If you anticipate losing the dependency exemption for the 2016 tax year, you can be proactive by electing to have more money withheld from your paycheck. This can reduce shocking surprises when filing time rolls around.
With a divorce come many changes, including tax options that can affect you and your children financially. If you need legal assistance in a California divorce, the attorneys at the Law Offices of Judy L. Burger can help. Make the call today to learn how our attorneys can work for you and your children: (415) 293-8314.