No one, and I mean no one, is ever happy paying New Jersey Alimony to their former spouse. Ranging from lasting bitter feelings to affordability, it is a check that people despise writing. However, an ironic bright side to paying alimony does exist thanks to the Internal Revenue Service, which provides a significant tax deduction. Over my nearly two decades as a New Jersey Divorce Attorney, I have talked many clients, “off the cliff,” when discussing their alimony exposure once I explain that the alimony amount is a gross figure (pun intended). I then continue that once we “tax effect” the number, it is a much kinder amount than they initially believed and it is affordable. Once my client digests the “net” amount that they are ultimately going to pay, they realize that they are going to, “live to tell about it.” Let’s explore further.
How is alimony defined?
Section 71(b)(1)(a) of the Internal Revenue Code defines alimony as a payment received under a divorce or separation instrument.
What are the requirements of alimony?
For payments to an ex-spouse to be considered alimony for Federal income tax purposes, it is extremely important that they meet a specific set of criteria. If it is found that the payments do meet the mandated conditions, they are deductible by the payor under Section 215 of the Internal Revenue Code. Additionally, if the payments do meet the necessary conditions, they are included in the income of the payee under Section 71 of the Internal Revenue Code. The following seven conditions are what payments must meet to be considered alimony:
1) The payment must be necessitated by a divorce or separation instrument
a) If an alimony payment is not required by an instrument, it must decree such as a final judgment of divorce, property settlement agreement, or pendente lite agreement. If the payment is made voluntarily, it is not considered to be alimony according to the Internal Revenue Code. Also, pursuant to the code, Section 71(b)(2) states that oral payment provisions do not qualify as alimony. Furthermore the payment will not be considered alimony if a pendente lite agreement does not meet all of the requirements of alimony.
2) The payment must be made either by check, money order, or in cash
a) If the payor spouse decides to transfer property such as investments, assign or execute a debt instrument, or use the property, it will not count as alimony.
3) The payment is no longer mandated upon the death of the receiving spouse
a) If the payor is responsible to continue making payments for any length of time after the receiving spouse dies, the payment is not considered to be alimony. Additionally pursuant to Section 71 (b)(1)(d), a payment is also not considered to be alimony if the payor is responsible to make any payment in cash or property to the estate of the deceased spouse after the payee’s death.
4) The payor and the payee are not allowed to be living in the same household at the time each payment is made
a) Accordingly, the amount of alimony received is not taxable to the payee. However, if the payments are made under a pendente lite agreement before the final judgment of divorce, whether or not the parties are living together is irrelevant.
5) The payment is not allocated as something other than alimony
6) The payment is not for child support
7) The payor and payee do not file jointly for their income tax return
a) However, once the divorce is made final, this issue is irrelevant because the parties can no longer file a joint tax return if they are divorced on the last day of the year
Even if the payments appear to by alimony or are intended to be spousal support payments, if the payments meet any of the following criteria, they will not be treated as alimony for Federal income tax purposes:
1) The payment is not necessitated by a divorce or separation instrument
2) The payment is not made by check, money order, or in cash
3) The payment is considered for child support
4) The payment corresponds to the payee’s part of community income
5) The payment is used to maintain the payor’s property
It is also important to note that even if a payment is deemed alimony for one spouse, it is not necessarily alimony for the other spouse. The determination on whether or not the payment is considered alimony is made independently for each spouse; it is neither issue or claim preclusion as to the other spouse.
Moreover, alimony is treated as taxable compensation for purposes of deciding who is eligible for an IRA deduction. This enables the payee who is not earning income to make a contribution to an IRA account.
Can payments made to third parties qualify as alimony?
Any payment made to a third party by the payor for the payee pursuant to a divorce is considered alimony. These direct payments to a third party are in place of a situation where the payor would pay the payee, who would then pay the third party. This method is typically used for payments like rent, a mortgage, tax liabilities, or tuition liabilities.
Can payments of insurance premiums qualify as alimony?
If all of the following criteria are met, payments of insurance premiums can qualify as alimony:
1) The payments must be made based on the terms of the support agreement
2) The payee must own the insurance policy
3) The insurance policy must insure the payor’s life
4) The insurance policy is not meant to secure future alimony payments
Again, it is crucial to note that if an existing policy is transferred from the payor to the payee, the owner of the policy must be immediately changed. Please never hesitate to contact my office at 732-246-0909 or Edward@weinsteinlawoffice.com if you would like to discuss this paramount issue.