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Don't let the tax bill for your alimony catch you by surprise

If you are headed for divorce, you may expect to receive spousal support, or alimony, as part of your divorce settlement. In cases where one spouse is the main breadwinner and the other takes care of the household, spousal support is often part of the divorce decree. For example, if your husband has been working while you put your career on hold to take care of the kids, then alimony might be in your future.

While spousal support often provides a source of income that many women need, it does not come free and clear. In fact, spousal support usually has tax consequences. If you do not take the time to learn about these tax issues, you may find yourself staring at a letter from the Internal Revenue Service (IRS) demanding that you pay additional federal income taxes.

Alimony is taxable income

Your divorce decree or settlement does not dictate the tax treatment of the alimony you receive. Instead, the IRS oversees the tax treatment of your spousal support, and, in the eyes of the federal government, it is taxable income. This means that you might owe taxes on it come April 15. If you are used to your employer deducting taxes on your behalf and receiving a refund from the IRS, this might change if you receive alimony. In order to avoid a nasty tax bill when you file your tax return, you can make quarterly payments to the IRS or increase the withholding on your paychecks.

Reporting requirements

The Internal Revenue Code dictates that you must report the full amount of alimony you receive each year. It also requires that your spouse report the amount he or she paid you on a personal tax return. If you do not report the alimony in full, you could end up facing an IRS audit.

Lump sum vs monthly payments

If you choose to receive monthly alimony payments, the provision must be part of your divorce decree or settlement. If your spouse begins to provide you with spousal support before the date stipulated in your divorce documents, the IRS typically does not consider these to be alimony.

Therefore, if your divorce decree specifies that your spouse is to begin paying alimony on the first of the year and every month thereafter, then you would start calculating the support you receive on the date of that first payment.

Furthermore, these monthly payment will be part of your taxable income, as stated above. However, if you choose an up-front lump sum payment as part of your divorce settlement in lieu of monthly alimony, then the amount you receive is generally not taxable since the IRS typically takes the stance that the one-time payment is part of the marital property division.

If you are planning to divorce and believe that you will receive alimony as part of your settlement, it is important to consider the tax consequences. By taking into account the tax issues surrounding spousal support and certain assets that are part of your divorce settlement, you increase your chances of receiving a fair outcome in your divorce.

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