If you’ve endured the agony of a divorce—and more than 50 per cent of Americans have—there’s a good shot you’re paying alimony.While cutting your ex-spouse a check every month probably feels brutal, take comfort in the fact that these payments can be tax deductible.
What’s more, your ex-spouse must report what you give him/her as taxable income.
Follow these guidelines to take advantage of your deductions:
1. Make sure to file a separate tax return (1040 form) from your ex-spouse.
2. Be sure you’re no longer living in the same household as your former husband/wife. Otherwise the alimony you pay would be going toward shared expenses (heating, electrical, etc.).
3. Payments must be made in cash or cash equivalents like checks or money orders. Transferring goods or property to your ex-spouse are not tax deductible, according to the law.
4. You can make payments to a third party on behalf of your ex to services like attorneys or mortgage lenders that count as alimony. Paying directly for your ex-spouse’s medical expenses, housing costs, taxes, tuition, etc. also counts.
To guarantee these third party payments qualify, you must receive a written request from your ex confirming the third party route is how s/he would like to get paid, and that you agree it will be made in lieu of cash. The request must be delivered before you file your return for the year you made the payments.
5. Child support should not be included as part of your alimony sum. The IRS has been on the lookout for this recently, says eHow.com. So to determine whether a payment qualifies as child support you’ll need to visit the IRS website.
For example, if you must pay your ex-spouse $4,000 a month, and when your child turns 18 the payment will be reduced to $2,000, you can only count the $2,000 you paid every month towards alimony. The rest the IRS will consider as child support.
6. Exclude payments you make on a property you own. If you have a spouse living rent-free in place that’s yours, and you pay the mortgage, real estate taxes, insurance, repairs, etc., non of those payments count towards alimony because you own the debts like the property. The lost rent from your spouse living there does not count either.
7. Your divorce or separation agreement can’t say your payments are not alimony.
8. If your ex dies, your alimony obligations end. Failure to meet this requirement is how most people miss out on the deductions, according to SmartMoney’s Bill Bischoff.
9. Alimony includes payments you make on life insurance premiums to the extent your ex-spouse owns the policy. (The divorce or separation agreement mandates you make this type of payment.)
10. Expenses for a jointly-owned home can also count towards alimony. For example, if you pay all of the mortgage payments, principle and interest, you can deduct half of the total payments as alimony. You can also deduct half of the interest as an interest expense. The IRS’s Table 4 under expenses for a jointly-owned home outlines the rules in greater detail.
If you don’t meet the guidelines, then the IRS considers your payments to be child support or simply part of the divorce settlement, neither of which is tax deductible.
Rules vary state by state, and the guidelines presented above are federal. Also, if you divorced before 1985 the rules may be slightly different for you. Check with a tax attorney or the IRS website to be sure.