Alimony and Taxes

As with nearly every other matter having to do with the transfer of money, both the payment and the receipt of alimony have federal and state tax ramifications. Consequently, it is important for the payor as well as the payee to understand the tax consequences that may follow from an award of alimony. If you have questions regarding how these payments may affect your tax liability, contact Bergen County alimony lawyer Brian D. Iton. He is available to help divorcing spouses in New Jersey understand their financial obligations.

Under the Internal Revenue Code, gross income is “income from whatever source derived,” which, by statute, includes income from alimony. Thus, individuals who receive alimony payments must report the total amount of alimony payments received in a given tax year as taxable income on their federal returns. To do this, they must use IRS Form 1040, which, on line 11, specifically delineates alimony received.

Correspondingly, people who pay alimony must also use Form 1040 in order to be able to deduct alimony payments from their income, as delineated on line 31, which also requires the taxpayer to report the receiving spouse’s tax identification number. Since these payments affect a tax-payer’s adjusted gross income (AGI), alimony can affect one’s tax liability as well as one’s income tax bracket.

Likewise, in terms of state tax liability, New Jersey requires state income tax filers to report alimony income and alimony payments (lines 24 and 31, respectively, on form NJ-1040), which affect the taxable income of ex-spouses.

In order to qualify as alimony for the purposes of either income or a deduction, certain requirements must be met:

• The parties cannot file a joint return;
• Payments must be made in cash (i.e., a cash instrument, rather than non-monetary services, benefits, or other forms of “payment”);
• The payments must be made pursuant to a divorce or separation instrument, and they may not include payments specifically designated as something other than alimony (e.g., child support or part of an asset division);
• For any particular payment to qualify, the spouses may not be cohabitating at the time it is made; and
• The separation or divorce instrument must provide that the payments in question cease after the death of the spouse or former spouse.

Furthermore, voluntary payments are not deductible. For example, if one spouse decides to “help out” an ex-spouse with a down payment on a car, or otherwise provide funds not mandated as part of the divorce or separation instrument, those funds may not be deducted from income for the payor, and the payee need not regard such payments as income.

However, certain payments of funds on behalf of an ex-spouse may be treated as alimony for tax purposes. For example, if an ex-spouse is required by a divorce settlement to pay the mortgage on a house owned by the other ex-spouse, those mortgage payments may be regarded as alimony because they provide a direct financial benefit to the ex-spouse. This may also be true of other direct payments to a third party, such as insurance premiums or car payments, if those payments are mandatory under a divorce or separation instrument.

Finally, it is important to be aware that, if one party owes both child support and alimony but fails to pay both obligations in full, tax law construes any payments to first satisfy the child support obligation, and alimony secondarily. Since child support payments are not tax deductible or reportable as income, this means that a failure to pay the full amount reduces the amount that the payor may deduct from income, as well as the income the payee must report.

If you are undergoing a divorce that may involve alimony payments, or if you are already paying or receiving alimony and need help understanding the tax ramifications, contact family law attorney Brian D. Iton. He has over two decades of experience representing residents of Northern New Jersey in alimony matters, as well as a host of other divorce and family law issues. Call today toll-free at (844) 431-3380, or use our online form to set up a free consultation with a Bergen County alimony attorney. Brian D. Iton represents people in Hackensack, Jersey City, Paterson, and Newark, among other cities in Bergen, Hudson, Passaic, and Essex Counties.