Spousal Support: Is Alimony Taxable? Answers to 7 Common Questions

spousal-support-alimony-taxable

Often, people going through a divorce do not know exactly what they are entitled to—and what might be awarded to a soon-to-be-former spouse. I want to give you some important details on spousal support that everyone going through divorce should know.

What is Spousal Support?

Spousal support, also called alimony, is payments made from one spouse to another after divorce. The overall purpose of spousal support is to lessen the burden on the spouse who earns lower wages than his or her former spouse. An amount of money is awarded to one of the spouses per a written agreement, or by a court-mandated decision.

During a marriage, one spouse oftentimes sacrifices a career to stay home and raise children. In such a case, whoever has given up his or her career is obviously unable to continue the standard of living that existed during the marriage. As a result, spousal support is awarded.

Is Alimony Taxable?

Yes. Alimony is taxable as income to the recipient. Only payments specifically made as part of the divorce decree or separation agreement are considered alimony for tax purposes, meaning that voluntary or bonus payments are not included. From a tax perspective, temporary spousal support is equivalent to permanent spousal support. However, certain types of payments do not qualify as spousal support:

•   Child support

•   Noncash payments

•   Money for maintaining the payer’s property, such as repairs on a home

•   Use of the payer’s property, for example, lending a home to a former spouse

Is Alimony Tax-Deductible?

Yes, spousal support is tax-deductible to the person paying it. Child support, however, is neither taxable to the recipient nor tax-deductible to the payer.

Can you make spousal support payments to a 3rd party?

Yes. You can make payments to a third party on behalf of an ex-spouse and qualify for spousal support. For example, payments for medical expenses, taxes, and tuition can still qualify as spousal support. Payments must be made in cash, so transferring property or providing a service for payment does not count as spousal support in the eyes of the IRS.

How is spousal support calculated?

Every state is different, and each divorce is unique. In fact, the court system has a wide range of criteria when deciding whether spousal support will be awarded. Typically, many factors are considered, including the financial condition of both parties, the duration of the marriage, the standard of living while the marriage existed, physical and emotional issues, and the time that is needed for the recipient to be self-supporting.

How long does alimony last?

Spousal support is not terminated until the date specified on the divorce decree, or until the court makes that decision. If the recipient marries again, spousal support from the former spouse is almost always terminated.

Although not typical, there are situations when it is permanent. If the spouse is elderly (or has medical issues that hinder him or her from working), he or she may very well receive alimony for the rest of his or her life. If the payer passes away, the payer’s estate (and money from life insurance policies) may very well be granted to the former spouse.

Can you change spousal support?

Sometimes life happens, and your circumstances change. The spouse paying support may lose their job, become disabled, or retire. If these circumstances change, it can be grounds to change spousal support. Spousal support can be terminated if the spouse receiving support remarries or (in some states) moves in with someone else. Spousal support can even change if there is a change in child custody (separate from changing child support).

Even though it is possible to change spousal support, it will not be easy. You will be starting another legal battle, which can get very expensive. If you want to pursue that option, you should have a compelling reason for justifying a change. You will not be able to guarantee the outcome, even if you have a convincing case. If you are the person paying spousal support, you should accept that it may not be possible to change it. If you are receiving spousal support, make sure you are getting enough to live on, and budget accordingly.

Shawn Leamon, MBA, CDFA is the host of the “Divorce and Your Money Show” and Managing Partner of LaGrande Global, with offices in Dallas, New York and Hanover, New Hampshire.

Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.