During a divorce, alimony, also referred to as spousal support, is the exchange of money between former spouses when, at the end of a fairly long marriage, there is a substantial difference in the parties’ actual income or income earning ability. The federal tax code permits the person paying a spousal support to deduct the payment from their federal tax obligation and further requires the recipient to report alimony as income, no different than a paycheck from a job. Section 71 of the Internal Revenue Code (IRC) has certain technical requirements for purposes of deducting and declaring alimony upon tax returns. Among these is the requirement that there be a written document between the parties memorializing the alimony obligation.
While most people would expect that the writing requirement mandates a document of great formality the tax court has ruled to the contrary. In fact, in several reported tax court decisions the mere exchange of letters regarding the alimony obligation between the parties or letters written between attorneys has been held to satisfy the written separation agreement requirement of Section 71 of the IRC. Therefore, in the event one spouse is paying the other spouse support even without a Court Order, various revenue rulings permit those payments to be deducted by the party paying the spousal support obligation. A recipient should be aware that they will then have a tax obligation on every dollar received under such an arrangement.
It may be advisable, particularly for the party receiving alimony, to consult with an accountant for tax-planning purposes. Unlike typical W2 wages, there is no generally automatic tax withholding from alimony payments. If no preparation is made, the receiving spouse made find him/herself in the position of owing a substantial debt to the IRS upon filing annual income tax returns.
It is always wise to contact a competent attorney who understands the tax code and the alimony laws of the particular state in which you are divorcing your spouse.
Author: Christopher Musulin, Esq., is a NJ Divorce Attorney in Mt. Holly, NJ, who has written various articles on Alimony laws in New Jersey.