Effects Of Connecticut Alimony Payments On Federal Tax Liability
Alimony, also known as spousal support, is often awarded to the lower-earning spouse following a divorce or legal separation. The amount of the alimony award is determined by a court-ordered divorce decree or settlement agreement. Alimony may be awarded in a lump sum or periodically on a short-term or long-term basis, depending upon the specific circumstances of each marriage and each divorcing spouse’s needs. Connecticut law governing alimony payments can be found in Connecticut’s Dissolution of Marriage Statute at ch. 815j, § 46b-82.
Many clients who have been either giving or receiving alimony have questions on how alimony payments can affect their tax liability. At The Prince Law Group, LLC, we hope the following information on the Internal Revenue Service’s (IRS) treatment of alimony payments will be helpful in explaining tax liability.
IRS Defines Alimony
The IRS defines alimony as “Amounts paid under divorce or separate maintenance decrees or written separation agreements.” It specifies that alimony cannot be paid if spouses file a joint tax return or live in the same household, and states alimony must be paid in cash (including checks or money orders) and received on behalf of the former spouse. Alimony may be court ordered as a temporary support payment before a divorce is final.
The IRS distinguishes between alimony and other monetary transfers that take place during and after divorce. Money directly transferred from one former spouse to another by means of a bank transfer, check or cash in hand for the purpose of support and maintenance of the receiving spouse is considered alimony. Money transferred to a third party for a former spouse’s benefit, such as court-ordered health insurance payments for the former spouse, housing costs, tuition, etc., may also be considered alimony, according to IRS guidance.
The IRS does not consider certain other property transfers that take place after a divorce to be alimony. Examples of non-alimony property transfers include property transfers pursuant to non-cash property settlements, child support, payments from a homeowner to keep up her own property and value of the non-home owning spouse’s use of the home owning spouse’s property.
Tax Treatment of Connecticut Alimony
Whether or not a property transfer may be considered alimony can impact tax consequences of the transfer. On yearly income taxes, alimony must be declared as taxable income by the recipient. The former spouse ordered to pay alimony may deduct it from her income. Portions of the IRS Form 1040 specify where alimony payments and receipts must be declared.
For example, tax treatment of alimony is distinguishable from tax treatment of child support paid from a noncustodial to a custodial parent. Child support payments, by contrast, are not deductible by the payor (often the non-custodial parent), nor are they taxable as income to the recipient (often the custodial parent). Thus, when the custodial parent is calculating income to determine whether she needs to file a tax return with the IRS, she need not include alimony payments received as part of her income.
Connecticut Alimony Payments and Real Property
Joint Ownership: Calculating alimony for tax purposes becomes more complex when alimony derived from real property ownership is involved. Accordance to IRS guidance, if you and your former spouse jointly own a home and one former spouse pays all of the mortgage payments, half of the mortgage payments are considered alimony. This means the payor may deduct half the mortgage payments and the recipient must include half of the mortgage payments as income on their tax returns. In most cases, the payor can claim an itemized deduction of half the interest as an interest expense. The recipient can deduct half the interest as well.
If you or your former spouse own property as “tenants in common,” and one former spouse likewise pays all the mortgage payments, the payor may deduct the value of half of the mortgage payments from income and the recipient must declare half the value of the mortgage payments as income. The payor cannot get tax forgiveness on the second half of the mortgage payment because that payment preserves the payor’s interest in the property. Both former spouses may deduct half of the real estate taxes from their incomes.
Sole Ownership: If one party outright owns a home and pays for all expenses of that home including mortgage payments, real estate taxes, repairs, and utilities, the money paid toward home expenses is not alimony and cannot be deducted. This is still true if the non-owning former spouse continues to live in the home rent-free by way of a court-ordered divorce settlement. The reasoning behind this rule is that the homeowner is making payments to preserve his or her interest in the property.
Determine Your Options with Our Stamford Divorce Attorneys
Determining proper tax treatment of monetary transfers received during and after divorce can be a complicated task, and one that carries significant financial consequences. The experienced divorce and family law attorneys at The Prince Law Group, LLC, in Stamford, Connecticut can help guide you through this process. Contact Us to set up a consultation at 203-653-8483.