Divorce and taxes: How is alimony treated for tax purposes?

There are several ways in which divorce can affect your taxes.

If you have children, one of the issues is who gets the tax exemption for dependent children. We discussed that a few months ago, in our October 10 post last year.

In this post, let’s look at the question of alimony, which in Texas is called “spousal maintenance.”

Alimony payments made to a former spouse can generally be deducted on your federal taxes. Payments to support a spouse that are made pursuant to a formal, written separation agreement are also generally deductible.

For the spouse who receives alimony or spousal support, the payments are considered taxable income. The income is taxable in the year it is received.

Logically, then, deductions for alimony payments and reported income from those payments should match up. One person deducts the payments while the other reports the income.

In practice, however, the gap between what is deducted for alimony and what is reported is remarkably large.

In 2014, the Treasury Inspector General for Tax Administration (TIGTA) look into this matter. TIGTA estimated the tax gap at an astounding $2.3 billion for the year it studied (2010).

How could this be?

Well, one reason might be creative lawyering. A divorce agreement could be drafted in a way to state that even though periodic payments are being made to a former or separated spouse, they are not alimony.

This doesn’t mean, however, that the parties are free to call payments anything they want. And the upshot of the TIGTA report is that the IRS is prepared to scrutinize returns involving alimony payments more closely than it did previously.