Chapter 18 Alimony ey.com/EYTaxGuide
This chapter discusses alimony and child support and the complicated tax rules and regulations that apply.
Designing a divorce decree, a separation agreement, or a support decree is rarely an easy task. Marital settlements are so diverse and so complex that no two situations are the same. One common element, however, is likely to be the payment of alimony. Alimony is an amount subject to one of these settlement agreements that is not considered child support or a property settlement, and that meets certain specific tests. If certain circumstances are met, alimony is a deduction from gross income for the spouse who pays it and included in the income of the spouse who receives it.
Alimony may take many different forms. The payment by one spouse of the other spouse’s share of mortgage and other costs for jointly owned property may be considered alimony. The payment of life insurance premiums on policies irrevocably assigned to a spouse may also be considered alimony. Alimony may even include the payment of medical and dental expenses. This chapter discusses what should and should not be considered an alimony payment.
The Deficit Reduction Act of 1984 completely restructured the alimony rules. The old rules still apply to alimony payments made under pre-1985 divorce and separation agreements, unless those agreements have been specifically modified. For related information, refer to Dependency exemption chapter 3 , Personal exemptions and dependents) , the Child and dependent care credit chapter 33 , Child and dependent care credit) , Head of household status chapter 2 , Filing status) , the Earned income credit Retirement savings credit chapter 37 , Other credits including the earned income credit ).
This chapter discusses the rules that apply if you pay or receive alimony. It covers the following topics.
What payments are alimony. What payments are not alimony, such as child support. How to deduct alimony you paid. How to report alimony you received as income. Whether you must recapture the tax benefits of alimony. Recapture means adding back in your income all or part of a deduction you took in a prior year. Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument.
Alimony is deductible by the payer and must be included in the spouse’s or former spouse’s income. Although this chapter is generally written for the payer of the alimony, the recipient can use the information to determine whether an amount received is alimony.
To be alimony, a payment must meet certain requirements. Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. This chapter discusses the rules for payments under instruments executed after 1984. If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. That was the last year the information on pre-1985 instruments was included in Publication 504.
Use Table 18-1
Definitions. The following definitions apply throughout this chapter.
Spouse or former spouse. Unless otherwise stated, the term “spouse” includes former spouse.
Divorce or separation instrument. The term “divorce or separation instrument” means:
A decree of divorce or separate maintenance or a written instrument incident to that decree, A written separation agreement, or A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement). You may want to see:
504 Divorced or Separated Individuals The following rules apply to alimony regardless of when the divorce or separation instrument was executed.
Payments not alimony. Not all payments under a divorce or separation instrument are alimony. Alimony does not include:
Child support, Noncash property settlements, Payments that are your spouse’s part of community income, as explained under Community Property in Publication 504, Payments to keep up the payer’s property, or Use of the payer’s property. Payments to a third party. Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be alimony, if they otherwise qualify. These include payments for your spouse’s medical expenses, housing costs (rent, utilities, etc.), taxes, tuition, etc. The payments are treated as received by your spouse and then paid to the third party.
Table 18-1
Payments ARE alimony if all of the following are true: Payments are NOT alimony if any of the following are true: Payments are required by a divorce or separation instrument. Payments are not required by a divorce or separation instrument. Payer and recipient spouse do not file a joint return with each other. Payer and recipient spouse file a joint return with each other. Payment is in cash (including checks or money orders). Payment is: Payment is not designated in the instrument as not alimony. Payment is designated in the instrument as not alimony. Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Spouses legally separated under a decree of divorce or separate maintenance are members of the same household. Payments are not required after death of the recipient spouse. Payments are required after death of the recipient spouse. Payment is not treated as child support. Payment is treated as child support. These payments are deductible by the payer and includible in income by the recipient. These payments are neither deductible by the payer nor includible in income by the recipient.
Life insurance premiums. Alimony includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy.
Payments for jointly-owned home. If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse, some of your payments may be alimony.
Mortgage payments. If you must pay 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. If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Your spouse must report one-half of the payments as alimony received. If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest.
Taxes and insurance. If you must pay 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. Your spouse must report one-half of these payments as alimony received. If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance.
If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance.
Other payments to a third party. If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony.
The following rules for alimony apply to payments under divorce or separation instruments executed after 1984.
Exception for instruments executed before 1985. There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985.
A divorce or separation instrument executed before 1985 and then modified after 1984 to specify that the after-1984 rules will apply. A temporary divorce or separation instrument executed before 1985 and incorporated into, or adopted by, a final decree executed after 1984 that:Changes the amount or period of payment, or Adds or deletes any contingency or condition. For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, get the 2004 version of Publication 504 at www.irs.gov/pub504
Example 1. In November 1984, you and your former spouse executed a written separation agreement. In February 1985, a decree of divorce was substituted for the written separation agreement. The decree of divorce did not change the terms for the alimony you pay your former spouse. The decree of divorce is treated as executed before 1985. Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984.
Example 2. Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. In this example, the decree of divorce is not treated as executed before 1985. The alimony payments are subject to the rules for payments under instruments executed after 1984.
Don’t overlook the opportunity to use the new rules on an old divorce.
Bob and Mary were divorced in 1982, with Mary agreeing to pay Bob $2,000 per month in qualifying alimony payments. Mary was a stockbroker earning top dollars in 1982. Bob had never had a full-time job. In 2014, Mary’s fortunes are not so rosy, whereas Bob is a top Los Angeles real estate broker.
Bob and Mary could agree that, in 2014, Mary will pay less money to Bob but that it won’t be considered alimony. If Mary’s marginal tax bracket has dropped to 15% and Bob’s tax bracket is 39.6%, Mary could pay Bob as little as 60.4% of what her normal payment is ($1,208), and both would win. If Mary were to pay Bob $2,000 in alimony, and take the associated deduction, her after-tax out-of-pocket expense would be $1,700. Bob would reflect $2,000 in income, which would equate to $1,208 after tax. Thus, if they would agree to a $1,208 payment, Bob would receive the same amount in after-tax dollars, but Mary would come out ahead.
Alimony requirements. A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met.
The payment is in cash. The instrument does not designate the payment as not alimony. Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. There is no liability to make any payment (in cash or property) after the death of the recipient spouse. The payment is not treated as child support. Each of these requirements is discussed below.
Cash payment requirement. Only cash payments, including checks and money orders, qualify as alimony. The following do not qualify as alimony.
Transfers of services or property (including a debt instrument of a third party or an annuity contract). Execution of a debt instrument by the payer. The use of the payer’s property.
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504 Divorced or Separated Individuals