What are “gross income” tax implications of alimony payments? Alimony is court-ordered support from one spouse to another under a divorce or separation agreement. The purpose of alimony is to allow a receiving spouse to enjoy the same or similar type of lifestyle that he or she had during the marriage relationship.
Alimony Reform Act of 2011
In 2011, Massachusetts adopted the Alimony Reform Act. The Act, which took effect in March, 2012, governs the type, the amount, the duration, and the termination of alimony payments. This ensures that alimony payments do not endure if their endurance would be unequitable or unfair. The goal in Massachusetts is to achieve an equitable result based upon several factors about the marriage relationship.
It is important to note that child support is separate from alimony. Child support is awarded to a custodial parent, so that the children are financially supported when a divorce occurs between a child’s or children’s parents.
In the Commonwealth, there are four types of alimony: (1) General Term alimony (provides regular support for a length of time based on the length of the marriage); (2) Rehabilitative alimony (provides regular support until the ex-spouse is able to be self-sustaining); (3) Reimbursement alimony (provides regular or one-time support for a shorter marriage to make up for costs that the ex-spouse paid in supporting the other spouse); and (4) Transitional alimony (provides regular or one-time support).
Gross income tax implications:
People who pay or receive alimony payments need to consider the “gross income” tax implications involved with the paying and receiving of alimony payments in a divorce. An experienced family law attorney and tax professional should handle this important consideration, especially since income is handled on a federal and state level.
For example, suppose that a couple divorces in Massachusetts. The judge orders that the former husband pay $2,000.00 each month to the former wife. Are any of the former husband’s payments to his ex-wife deductible? In other words, how may the husband handle the alimony payments that he makes to his wife for tax purposes? The law states that a payer may deduct alimony payments from gross income and the collecting spouse includes alimony payments in gross income. Any alimony received is included in federal gross income; the receiver must therefore include it as Massachusetts gross income. With the example mentioned, the husband is likely able to deduct his alimony payments that he transacts to his ex-spouse. The former wife will have to include the payments that she receives as her income.
If the former husband and former wife in the aforementioned example have a child or children together and the former husband is ordered to also pay for child support, may the former husband include any child support payments as an alimony deduction? No, because the law states that a child support payment does not qualify as an alimony deduction. The recipient, in this case the wife, cannot include any amounts in gross income.
For example…
Here is another example: Sally and Joe decide to divorce. Sally and Joe have three children together between the ages of 6 and 14. Sally works as a public school teacher in an inner-city school and earns $45,000 per year. Joe is a CEO of a company and earns $170,000 per year. A Massachusetts justice of the Family Court ordered that Joe make alimony payments to Sally in the divorce decree. Additionally, the judge ordered that Sally will have custody of the children, but Joe will make child support payments to Sally for the children. Sally and Joe want to know whether they must include the alimony and child support payments on their tax returns.
Joe is the person making the alimony payments to Sally; therefore, Joe may deduct his alimony payments on his tax returns. Sally, however, must include any alimony payments that she receives as “gross income.” Joe may not deduct child support payments and Sally should not include child support payments as income on her taxes; child support payments are awarded for the “best interest of the children”.
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