Charleston Alimony Tax Tips
Getting divorced is emotionally and financially draining
You want to put yourself in the best possible financial situation when your divorce becomes final. The last thing that you want is an IRS tax audit notice or tax deficiency letter because you did not handle alimony properly in your Charleston divorce settlement agreement.
Alimony will have more significance for your future tax liability than almost any other aspect of your divorce. I provide for you below a basic outline of some of the more significant alimony tax issues. You can use this general information, together with specific advice from your CPA and Charleston SC divorce lawyer, to save thousands of dollars in tax liabilities and avoid future tax problems.
- You May Deduct Your Alimony Payments from Your Taxable Income.
The only financial benefit from having to pay alimony is that you can deduct alimony payments from your taxable income. The dollar value of that tax deduction will depend on your income and tax rate. Similarly, if you are receiving alimony, one of the detriments of receiving alimony is that you have to include as taxable income the alimony that you receive from your former spouse.
- Alimony Must Be Court Ordered.
You may deduct alimony payments from your taxable income only if your Charleston SC divorce judge ordered you to make such payments. You cannot deduct as “alimony” any payment that you make voluntarily without a Charleston divorce court order.
- Charleston Alimony May Include Indirect Payments.
You can deduct from your taxable income a court-ordered payment that you make to a third-party for the benefit of your former spouse. As your CPA or Charleston SC divorce attorney can explain in detail, the tax definition of “alimony” can include payments that you make for housing, insurance, tuition, or medical expenses to benefit your former spouse. Alimony can include payments that you make directly to your former spouse, as well as payments that you make indirectly to your former spouse by paying such items. Charleston alimony can also include payments that you make to a third party if: (a) you pay someone else instead of your former spouse; (b) at the written request of your former spouse; and (c) you and your former spouse intend for those payments to be treated as alimony.
- You May Be Able To Deduct House Payments As Alimony.
After you are legally separated or divorced in Charleston SC, you will be able to deduct as alimony one-half of the mortgage payments (principal and interest) that you pay for a home that you own jointly with your former spouse.
- You May Be Able To Deduct Real Estate Taxes And/Or Home Insurance As Alimony.
Your Charleston SC divorce lawyer can structure the payment of alimony to maximize the tax benefit for you. The extent of this tax deduction depends on how ownership to the property is titled. If you and your former spouse own the home as “tenants in common,” you can deduct one-half of any real estate taxes or insurance that you are required to pay. Alternatively, if you and your former spouse own the house as “joint tenants” or “tenants by the entirety,” none of the real estate tax or insurance payments is deductible unless you itemize your deductions. If you itemize your deductions as a joint tenant or tenant by the entirety, you can deduct all of the real estate taxes but none of the property insurance.
- Alimony Payments Can Be Made Nondeductible.
Contrary to popular belief, payments that you make to your spouse – that would otherwise qualify to be tax deductible as alimony – can be designated and treated for tax purposes as being nondeductible. This is a very technical tax and family law matter. To be sure that you do it correctly, you should hire a Charleston SC divorce attorney or CPA to advise you.
- You Should Clearly Express What Is To Be Treated As Alimony.
Federal law – not South Carolina law – determines whether a payment of spousal support will be tax deductible as alimony under Federal law. Consequently, it is very important for your Charleston SC divorce lawyer to state clearly in your divorce settlement agreement which payments are to be treated as tax deductible alimony, as contrasted with payments that are not tax deductible (e.g., child support or transfers of marital property). If your Charleston SC divorce attorney fails to properly express the intended tax-free treatment of a payment or property transfer, the IRS may treat that transaction as taxable alimony income to the person receiving the payment or property. This problem arises on occasion with: (a) equalizing payments in the division of marital property; (b) divisions of military retirement pay; (c) payments for life insurance; and (d) obligations to repay federally insured student loans.
- Alimony Must Stop When The Receiving Spouse Dies.
If all of the alimony payments will continue for some period of time after the death of the receiving spouse, none of the payments – which are made before or after the death – are tax deductible as alimony. To the extent to which some portion of the payments (e.g. 25% of the monthly alimony) continues after the death of the receiving spouse, you cannot deduct as alimony – before or after the death – the portion of the alimony that continues after the death of the receiving spouse. To avoid a potentially large tax bill, your Charleston SC divorce lawyer should state in your divorce settlement agreement that all alimony payments will cease upon the death of the spouse receiving the alimony payments.
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