The IRS Can Burn You on Your Alimony Payments! (Pt. 1)

Pile of tax papers on a desk
The alimony recovery rule can cost you a ton of money!

Are you divorced, and paying alimony to your ex as part of your divorce agreement? If the answer to that question is yes, then there’s something important you need to know about your alimony payments and Internal Revenue Service (IRS). Namely, you can get taken to the cleaners by the government if they suspect any fishy business with your alimony payments. Even if you’re completely innocent!

Wait! What does the IRS have to do with my alimony payments?

We’re talking about something called the alimony recapture rule. You may not have ever heard about it before, (many people haven’t, so you’re not alone!) but it can have a huge impact on your financial future. Specifically, the alimony recapture rule is what allows the IRS to “recapture” your income tax deductions for spousal support payments, if they decide the alimony payments you’ve been making were really part of a property settlement, or child support.

Why would the IRS think I’ve been cheating on my taxes?

If the IRS decides you’ve been disguising property settlement payouts or child support as alimony, they can tax your alimony payments. Yes, you read that right! Which means that all your past and future alimony payments will suddenly be taxable income! But what would make them decide you’ve been disguising other types of payments as untaxable alimony on your tax returns? Here are a few key things they look for:

  • If your alimony payments suddenly decrease substantially within the first few years after your divorce, or
  • If your alimony payments suddenly stop shortly after your divorce.

Why do changes in my payments make the IRS think I’m cheating?

When you get divorced, everything is clearly spelled out in your divorce agreement. Alimony and property division are two completely separate parts of that agreement, and for tax purposes, they’re treated completely differently.

For example, under current law, through 2018, alimony is deductible by the person who pays it, and it’s included in the income of the spouse who receives it. But property transfers aren’t deductible, and typically don’t have any tax consequences during divorce cases. Mixing them, however, especially when you’re being deceitful in the hopes of saving a few tax bucks, can get you into a lot of trouble.

Alimony is a contentious subject here in Oakland County!

Join us next time, when we’ll be answering a few more of your questions about alimony recapture and how to avoid being accused of tax fraud for just paying alimony like you’re supposed to! There’s no question about it – getting divorced is stressful! Trying to figure out how to divide your stuff, what’s best for your kids, and dealing with the money is very hard.

Our experienced Oakland County divorce attorneys have helped many hundreds of Michigan people through this process for decades. Divorce isn’t easy, but we treat our clients with the utmost respect, offering them professional and personalized legal guidance throughout the entire process. So call (248) 479-6200 today and speak to our top divorce attorneys.