Paying It? Getting It? Tips That Can Help Today
Alimony. The word itself conjures feelings of stress and struggle. But paying or receiving money from a spouse doesn’t have to be a negative experience. In fact, it can prove beneficial to both parties. Familiarize yourself with the process and learn how to reap the rewards “ whether you’re the payer or recipient.
“Alimony has specific requirements,” said
Tom Geraghty, a Fair Lawn, N.J.-based financial planner with the firm Stonegate Wealth Management. Usually, the person in the higher tax bracket benefits so the end goal is to balance out the alimony and child support so it is tax deductible to payor, and income to the payee. But, as always with divorce laws, state laws must be followed.”
As Geraghty attests, finding balance with alimony payments is the key to keeping the post-marital peace. Typically based on the disproportion of both incomes, alimony is a tool that can be used to level the playing field between spouses. But if the recipient chooses to remarry or cohabitate, in most states, all bets are off.
Usually the court will ask how long the marriage lasted, what the marital arrangements were, what lifestyle the couple enjoyed, what type of education and income the couple has and what is needed in order for the supported spouse to become self-sufficient, before deciding the amount of alimony that should be paid and the duration of the payments.
Alimony should not be confused with child support. Unlike the latter, alimony is treated as income “ meaning it’s taxable. Recipients must report the income on their taxes and payers can expense the money from their gross income “ a major incentive for high-earning spouses ordered to pay alimony.
Because of this advantage, the temptation exists for payers to overpay alimony. Don’t do it. Paying excessive alimony is inexcusable to the IRS. Paying a large amount of alimony during the first few years, and decreasing the payments after that is labeled front-loading” and is not tolerated either.
Alimony paid to an ex-spouse can be deducted from one’s taxes only if the following six conditions are met:
1.You don’t file a joint return with your ex-spouse;
2.Payments must be made in cash, check or money order;
3.Nothing specifies the payments are not for alimony;
4.The payer and recipient are not living in the same household at the time of the payments;
5.There is no responsibility to make payments following death of the recipient;
6.The alimony payment is not considered child support.
One of the biggest mistakes spouses make in dealing with alimony is that they forget the tax impact, said Linda Y. Leitz, CFP, EA, founder and co-owner ofPinnacle Financial Concepts, Inc. in Colorado Springs, Colo., and author of “We Need to Talk: Money and Kids After Divorce.” This is true whether a person is paying alimony or receiving alimony,” she noted. So if someone is paying alimony and doesn’t get some good tax advice to adjust the tax withholdings through their employer, they’ll be living on beans and wienies all year, then probably get a big refund.”
Likewise, if the recipient isn’t paying quarterly estimates or increasing tax withholdings at work, that person will have a nosebleed tax bill” when their return is prepared, she said. A certified divorce financial analyst or any competent tax professional can provide invaluable advice and how-to strategies no matter what type of alimony was awarded by the court: permanent, temporary, lump sum or rehabilitative.
Spouses ordered to pay alimony should try to fight for rehabilitative alimony if possible, suggestedJohn Mayoue, a partner with the firm Warner, Mayoue, Bates & Nolen in Atlanta, Ga., and one of the nation’s top divorce attorneys. That way, alimony can cease once a supported spouse has completed training, education, enters the workforce, or after a short period of time, whichever occurs first.
Payers should also make sure the alimony agreement ends not only upon the death or remarriage of their spouse, but on the entry into a meretricious relationship (one in which an unmarried couple cohabitates), Mayoue advised.
If you are ordered to pay alimony to your ex-spouse, make a list detailing each payment that includes the date of the check, the check number and what address the check was mailed to. Payers should also keep receipts signed by the recipient and, if possible, the original checks used for payments. It’s necessary to keep all of this documentation for at least three years from when a tax return that deducts the payments is filed.
If you are the one receiving alimony payments, be sure to keep a list that details each received payment. Include the date of the received payment, the amount of the payment, the check number, the account number and the name of the bank. A photocopy of the check and a receipt, if one was received, are also important to hold on to.
Though alimony is a source of stress for many, it doesn’t have to be. Follow the rules, consult with a professional if needed and allow your ex-spouse to move on. Doing so will help cut the ties that bind and allow you to move on as well.
