Taxation of Alimony Under Internal Revenue Code Simplified
Alimony is the amount associated with divorce . A painful arrangement , but that is a fact of life. Another fact is that the IRS desires its share out of such money received by you .In other words alimony is taxable income in recipient’s hand. At the same time, the payment of alimony is also deductible for the person paying . Yes, the amounts paid under divorce or separate maintenance decrees or written separation agreements entered into between you and your spouse or former spouse are considered alimony.However Internal Revenue Code provides a number of condition that must be consulted before you can claim the payment for separation as deduction from taxable income of the tax year.
When Alimony is Deductible from Your Taxable Income ?
The amount can be claimed as deduction from your taxable income of the year only if all the conditions given below are satisfied:
- No Joint return with spouse ( Spouse means former spouse also)
- Only cash (including checks or money orders) payments made and payment is received received by (or on behalf of) your spouse or former spouse
- The divorce or separate maintenance decree or written separation agreement does not say the payment is not alimony.
- If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment
- You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse, and
- Your payment is not treated as child support or a property settlement.
When Payments Not considered Alimony
There are various ways of payments for marriage separation. But , the internal revenue code does not recognize all such types of payments as alimony , even if the purpose of payment is not questioned. For, example voluntary payments do not qualify for federal tax purpose.Following types of payments do not come under the alimony meaning:
- Child support
- Non cash property settlements
- Payments that are your spouse’s part of community property income
- Payments to keep up the payer’s property, or
- Use of the payer’s property
- Transfers of services or property (including a debt instrument of a third party or an annuity contract).
- Execution of a debt instrument by the payer.
- The use of the payer’s property.
Child support is not deductible at all.
Role of divorce Instrument ?
The divorce or separation instrument considered valid for taxation of alimony or deduction of alimony payment means:
- A decree of divorce or separate maintenance or a written instrument incident to that decree,
- A written separation agreement, or
- A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement).
Should the tax must be withhold before payment ?
If a U.S. citizen or resident alien pay for divorce or an arrangement or under a decree of court for marriage separation to a nonresident alien spouse, one need to withhold income tax at a rate of 30% on each payment. The double taxation avoidance agreement signed by USA with the country in which the recipient of alimony is residing may be consulted to know if under the agreement the alimony is exempt from tax in USA . In that case , withholding of tax may not be done.