When a divorce is finalized in Florida one spouse may be awarded spousal support or alimony as a way to ensure he or she is financially cared for going forward for a period of time. However, alimony must be addressed when filing a Federal Income Tax return. Sometimes this is not discussed during dissolution of marriage case. Whether discussed in the divorce or not there are tax implications to paying and receiving alimony.
Both parties have to report alimony on their tax returns. The party who is paying alimony can report it as a tax deduction. The party receiving alimony must report it as additional taxable income. An example:
• A man is ordered to pay alimony to his ex-wife of $1,500 per month for alimony pays her ex-husband $1,000 every month for alimony. This results in him paying $18,000 per year. If his yearly income is a total of $88,000, after claiming the alimony as a deduction, his adjusted gross taxable income is $70,000.
•If his ex-wife has a yearly income of $32,000, her adjusted gross income will be $50,000 after she includes the alimony payments.
TAX INFORMATION REGARDING LUMP SUM ALIMONY PAYMENTS
The above example illustrates a situation in which alimony is being paid out over time. But, what about when alimony is awarded and paid as a one-time lump sum? Instead of paying alimony totaling $90,000 over the course of 5 years, instead a lump sum of $90,000 may be paid all at once. Generally, the same concept regarding taxability is going to apply. The person who pays the lump sum will claim it as a deduction and the person who receives it will report it as taxable income.
Regardless of the type of alimony paid the addition and subtraction of income due to alimony results in one person lowering their taxable income and the other person increasing their taxable income. If you are the party receiving alimony, you may wind up getting taxed in a higher tax bracket due to the addition of these funds being added to your total income.
IRS RECAPTURE RULE
This IRS rule is a way to ensure that one spouse is not trying to hide property settlements as alimony, because property settlements are not tax deductible. Also, the recapture rule ensures that alimony payments do not allow one party to get an improper tax break. This can be seen when one party tries to pay off their alimony obligation faster by paying more in one year than is required.
Here is how the rule works:
• There is a three-year review of these funds
• If the alimony paid Year 2 is more than $15,000 greater than what was paid in Year 3, then the ex-spouse who is paying the alimony will pay taxes on the amount that exceeds the $15,000 during Year 3.
• If the alimony paid in Year 1is at least $15,000 greater than what was paid in the Year 2 and Year 3, then the excess will be considered income for the spouse receiving the money.
There are exceptions to this general rule that spouses need to be aware of, and this is where Darren K Edwards can help. These exceptions can be highly case-specific, so in this case it is best to work with a Fort Lauderdale Divorce attorney who has experience in these situations like Darren K. Edwards.
