Divorce is complicated and stressful enough as it is. Between dealing with the emotional issues, often there are disputes over dividing the property, child custody and support and a dozen other things. Finally, it's all over, and then you're hit with a surprise: Income taxes.
In many divorces, alimony is awarded, and one or both spouses may still own the family home. Both situations have tax consequences, so it's best to know how to deal with them before the divorce is final, or at least before you file your tax returns.
Alimony & Taxes
For tax purposes, there's more to alimony than paying money.
Not Everything is "Alimony"
Just because you pay your ex-spouse money doesn't mean it's "alimony" (or "separate maintenance" or "spousal support").
A number of factors must be met before a payment is considered alimony by the IRS. Some of these factors include:
- You pay in cash (this includes checks and money orders)
- Payments are to, or for the benefit of, your ex-spouse
- You and your ex-spouse don't file a joint tax return
- You don't have to continue payments after your ex-spouse dies
- Payments don't include child support
Both Spouses Have Tax Issues
For the spouse who is paid alimony, the amount received must be reported as income on that spouse's income tax form. The spouse who pays may take a deduction for the payments. Both spouses must use IRS Form 1040.
The spouse paying alimony must give the IRS the other spouse's social security number; the spouse receiving alimony must give the number to the paying spouse. The IRS may impose a $50 fine for either spouse's failure or refusal to follow this rule. It may also disallow or deny the paying spouse's tax deduction.
Home-Related Payments & Taxes
As a general rule, homeowners enjoy many tax benefits when they itemize deductions. For instance, there are tax deductions for mortgage loan interest and real estate taxes paid. Whether you can take these deductions depends on who actually owns the house and whether the payments meet the other alimony requirements.
House Owned by the Spouse Receiving Alimony
You may deduct as alimony any mortgage payments, home insurance premiums and real estate taxes you pay on a home owned by your ex-spouse. That's because those payments are for your ex-spouse's benefit. Your ex-spouse must report the payments as income/alimony.
Your ex-spouse is entitled to the tax deductions for mortgage loan interest and real estate taxes, even though you actually paid those expenses.
House Owned by the Spouse Paying Alimony
Mortgage payments, real estate taxes and insurance premiums you pay for a home you own are not alimony - even if your ex-spouse lives in the home rent-free. You can't deduct the payments as alimony, and your ex-spouse doesn't have to report the payments as income.
You may, however, take the tax deduction for real estate taxes, and so long as it's a "qualified home" (your "primary residence"), you may deduct mortgage interest.
House Owned by Both Spouses
Usually, when both you and your ex-spouse own the home or you're both liable as cosigners on the mortgage loan, you're entitled to deduct as alimony one-half of the mortgage payment, real estate taxes and property insurance you pay. Your ex-spouse must report the payments as income/alimony.
Likewise, you and your ex-spouse each may take itemized deductions for half the real estate taxes paid, as well as mortgage interest paid (again, it must be a qualified home for this deduction).
Exception! When you and your ex-spouse own the home as "tenants by the entirety" or in "joint tenancy," none of the real estate taxes you pay may be deducted as alimony. However, you may take an itemized deduction for all the real estate taxes you pay.
Maximizing Tax Benefits
Both spouses can help make sure they're not losing out on valuable tax deductions and other benefits. You can use these as starting points when negotiating the terms of the divorce. For example, maybe your ex-spouse will agree to substantially less in monthly alimony payments in exchange for help paying the mortgage?
Where the alimony-paying spouse owns the home, or the home is owned in joint tenancy or as tenants in common, and only the ex-spouse will be living in the home, it may be a good idea to charge the ex-spouse rent. There's no deduction for alimony (and no income for the ex-spouse), but the owner-spouse may be able to take other valuable tax deductions for rental property.
Think of the Children
Naturally, you love your children and you want the best for them and to minimize the stress of the divorce. Not fighting over the home so they can go on living there, even if you won't be living there, is a noble. It may also mean tax benefits.
You may be able to take the itemized deduction for mortgage interest you pay on the home, even though it's not a "qualified home" for you. That's because the IRS rules allow for the deduction when a home is used for "personal use," which includes a home lived in by your children.
This is just a brief overview of some of the issues you may have to deal with when it comes to taxes and alimony and home deductions. As you can imagine, things can get very complicated very fast. The IRS has information that can help. No matter if you're paying or receiving alimony, it's crucial that you talk to an experienced divorce or tax law attorney if you have any questions at all.
Questions for Your Attorney
- I can't get my ex-spouse's social security number. Should I file my taxes anyway?
- Can we re-title the deed to our home before the divorce so that only one of us "owns" it? Should we?
- Can I deduct as alimony the value of some collectibles I gave to my ex-spouse at a time when I couldn't afford the monthly cash payment?