Is alimony taxable? If you’ve recently gotten divorced and are receiving (or paying) alimony for the first time, you may be confused as to how to the IRS taxes those payments. Alimony can trigger large tax payments, especially in high-dollar divorce settlements. Depending on your situation, you may be kicked into a higher tax bracket [1] or need to adjust your withholding to account for additional taxes owed.
source: Enter the Story [2]
What is alimony?
Alimony has a very specific definition in the eyes of the IRS. Alimony can be paid to a former spouse (in the case of a divorce) or current spouse (if legally separated). Alimony is specifically defined as “a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument.” In other words, giving to or receiving money from your former spouse “just because” is not alimony and will not be taxed as such (though it may be taxed as a gift [3] if it’s large enough).
Alimony must take the form of cash payments made for the benefit of a former spouse. Typically, alimony is a flat amount or percentage of the higher-earning former spouse’s pay that is paid to the lower-earning former spouse each month or year. It may not take the form of a property or other non-cash settlement, and must stop at the former spouse’s death. Child support or a one-time payment at the time of the separation are NOT alimony.
Do you have to pay taxes on alimony?
Alimony is taxable to the recipient in the year it is received. The alimony payer may deduct the same amount from his or her income. The taxation and deduction does not take place unless payments between former spouses exactly fit the definition above. In addition, the two parties may not reside in the same household or file a joint return [4].
If you are receiving alimony for the first time this year, your income (and thus taxes owed) may be substantially higher than last year. You may owe a penalty [5] to the IRS if you wait until the end of the year to pay taxes. To avoid this, adjust your withholding or make quarterly estimated payments [6] to account for the increased amount.
If alimony ends or substantially decreases within three years of the first payment, the payer may retroactively lose the deduction and the recipient may be able to recover some of the taxes paid. This is known as “alimony recapture [7].”
How do I calculate the tax on alimony?
Alimony is taxed at your regular income tax rate. If you receive alimony you must file your taxes using Form 1040 [8], and report the amount received on Line 11. You cannot use a shorter tax form. The alimony will be added to your other income to help determine taxes due. To calculate the taxes specifically owed on alimony, simply multiply the alimony amount by your marginal tax rate [9].
Alimony payers must also use Form 1040 instead of a shorter tax form. The deduction can be claimed even if you do not itemize deductions [10], and is reported on Line 30.
You can use the tax calculator [11] to compute your taxes; alimony income and alimony paid are both included in the calculator.
Read more
- What is the Marriage Tax Penalty? [12]
- IRS Publication 504 [13]: Divorced or Separated Individuals
- Topic 452 [14]: Alimony Paid