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The tax treatment of alimony payments

New Jersey residents whose divorce cases included an alimony order or agreement should be aware of how the IRS treats these payments, both for the payer as well as the recipient. People who make qualifying payments are able to claim deductions for them, while those receiving qualifying payments must report them as income on their federal income tax returns.

Not all payments are treated as deductible and reportable alimony by the IRS. Non-cash property settlement payments cannot be deducted. If one former spouse is simply voluntarily making payments to the other, those amounts may also not be deducted. Qualifying payments are those made pursuant to a separation agreement or an order of the court.

If the order or agreement provided for alimony and child support to be combined in a payment, the portion that represents the child support amount is not deductible. Payments made to a third party that are court-ordered or agreed to may be deducted, as long as the order or agreement so provides. Examples can include such things as rent, insurance, utilities, life insurance and medical expense payments made to vendors on behalf of the former spouse. People should be aware that they may not deduct cash payments made as a part of their marital property settlement as alimony.

The potential tax consequences of alimony may be an important topic for people to address with their family law attorneys. The tax benefits for payers as well as tax liabilities for recipients may have an impact on those who are engaged in divorce negotiations. A person who is aware that alimony is deductible may be more willing to agree to regular alimony payments in order to reap the tax benefits. Conversely, those who may want to receive alimony may be less likely to seek it if they understand the tax consequences they may face.

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