Federal Law in Regards to Alimony

by Beverly Bird
Paying alimony can be advantageous at tax time.

Paying alimony can be advantageous at tax time.

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Alimony laws can vary a bit from state to state. Jurisdictional rules decide when it is awarded, how much is awarded and for how long. Some states are alimony friendly, while in others, alimony is ordered less often. Federal law has an effect, too. It addresses tax and bankruptcy issues.

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Tax Deduction Rules

Alimony is tax deductible to the spouse paying it. You can write off the income you must give to your ex on the first page of your Form 1040 tax return "above the line" so it reduces your adjusted gross income. Some rules apply, however. If you're paying alimony under a temporary order during your divorce proceedings, you and your spouse cannot continue to reside under the same roof. You can't file a joint married return, and the alimony must take the form of money. For example, if your spouse is living in one of your investment properties rent-free while your divorce is pending, this doesn't qualify as alimony for tax purposes. You must also have a temporary order or decree that specifically obligates you to pay.

Claiming Alimony as Income

Someone has to pay taxes on the income you get to write off, so the Internal Revenue Service transfers this obligation to your spouse. You must enter her Social Security number on your tax return, showing to whom the money was paid. You can lose the deduction if you don't include this information, or you might be subject to a penalty. If you don't know your spouse's Social Security number, such as because you never filed joint returns or applied for joint loans together, or you don't have a copy of the paperwork, she can't refuse to give it to you. If she does, you can alert the Internal Revenue Service and they will charge her with a $50 penalty.

The Recapture Rule

The IRS has a tricky rule regarding alimony that prevents spouses from claiming deductions for transactions that aren't really in the nature of support, but are property settlement instead. Property settlements are not tax deductible. Because they typically occur in the first three years after your divorce is final, this is the period the IRS focuses on. If your alimony payments drop considerably during this time, you may have to recapture some of the payments in the third and final year. You must claim the money as income, effectively taking back the deduction and paying taxes on it, and your spouse is entitled to a corresponding deduction, because she initially paid taxes on the money. For example, if you give your spouse $50,000 for her share of equity in the marital home, your real support obligation will probably drop off considerably after the $50,000 is paid. If your payments drop by $15,000 or more in the third year from what they were in the second year, or if the alimony you pay in the third year is significantly less than what you paid in the first and second year, speak with a lawyer or accountant.

Bankruptcy Laws

If you can't keep up with your alimony payments post-divorce, federal law prohibits you from filing bankruptcy to get rid of the debt. You can still file on your other debts, but family support obligations are not dischargeable. Although the automatic stay restrains your spouse from using certain collection efforts while you're in bankruptcy, you'll still owe the money.