The Tax Impact of Spousal Maintenance Requires Careful Consideration When Negotiating the Terms of Divorce
Taxes should be a major consideration when negotiating the terms of divorce. At its simplest level, the party who makes any type of payment defined as spousal maintenance under federal tax laws can deduct those payments, while the recipient must declare the payments as income.
Qualified taxable income
Although the IRS does not consider payments such as child support, noncash property settlements and certain other transfers as spousal maintenance, here are some examples of payments that qualify under the alimony tax rules — and must be reported by both parties of divorce:
- Cash payments, such as one-time or periodic payments defined as spousal maintenance in the divorce agreement
- Payments to third parties paid on behalf of a former spouse, such as medical or housing expenses
- Payments for a jointly-owned home, such as when one party continues to contribute to the home while living elsewhere
- One half of mortgage payments when one party makes the full payment for a jointly-owned home
- One half of taxes and insurance when full payment is made for a home held as tenants in common, a legal definition that differs in certain ways from joint tenancy
Spousal support can have significant consequences for both parties beyond the actual cash outlay or income. For example, recipients of generous payments may later be surprised when they discover those payments place them in a higher tax bracket. The payments that initially appear fair can turn out to be devastating at tax time.
You need knowledgeable advice from an experienced attorney who understands all the ramifications of your divorce agreement when negotiating the terms of a Long Island divorce.