alimony and taxes

[marcsmom]

UPDATE...I FOUND IT...READ LAST POST BELOW.

What is the name of your state (only U.S. law)? FL

I've read somewhere in the recent past that a couple can make an agreement that alimony be non-taxable to the recipient and non-deductible for the payor? Is this true, or was I just dreaming it?

Thanks for your help.

 

[OHRoadwarrior]

You are dreaming it. Allowing that, would allow people with low incomes, to slip past public welfare programs.

 

[CJane]

You are dreaming it. Allowing that, would allow people with low incomes, to slip past public welfare programs.

I agree that it's not possible. But I don't get your logic. Care to splain?

 

[OHRoadwarrior]

If you do not report alimony as taxable income, you are committing tax fraud. If it was not for the duty to report, an unscrupulous individual might claim TANF or other benefits, figuring they would not be caught, because it was not reportable as income.

 

[CJane]

If you do not report alimony as taxable income, you are committing tax fraud.

This, I agree with.

If it was not for the duty to report, an unscrupulous individual might claim TANF or other benefits, figuring they would not be caught, because it was not reportable as income.

This, not so much. Welfare eligibility is not based on taxable income, but rather income from 'all sources'. For example, child support is not taxable, but will affect eligibility for state benefits.

 

[mistoffolees]

If you do not report alimony as taxable income, you are committing tax fraud.

I agree that it's not possible.

I disagree. The rules on alimony are very specific. Alimony is taxable to the recipient and deductible to the payor ONLY IF it meets a number of very specific requirements:
Tax Topics - Topic 452 Alimony Paid

If it does not meet any of those requirements, then it's not taxable income to the recipient or deductible to the payor. For example, if the decree simply says "this payment is not alimony", it is not legally alimony for tax purposes.

Of course, there are other ways to skin the cat. It could simply be listed as property division rather than alimony in their agreement. That's an over simplification, but could be made to work.

 

[CJane]

I disagree. The rules on alimony are very specific. Alimony is taxable to the recipient and deductible to the payor ONLY IF it meets a number of very specific requirements:
Tax Topics - Topic 452 Alimony Paid

If it does not meet any of those requirements, then it's not taxable income to the recipient or deductible to the payor. For example, if the decree simply says "this payment is not alimony", it is not legally alimony for tax purposes.

Then it wouldn't BE alimony, which is what the question was. It would be an effort to 'fool' the IRS into not taxing something that is clearly intended as alimony. Not a game I'd be willing to play, but whatever.

Of course, there are other ways to skin the cat. It could simply be listed as property division rather than alimony in their agreement. That's an over simplification, but could be made to work.

And again. If it's a property settlement, it's not alimony.

Perhaps it's splitting hairs, but OP specifically asked if there was a way to make alimony non taxable/non deductible. The above suggestions make it NOT alimony at all.

As such, I'm not sure you could have limitations/the ability to modify.

I can't see the IRS letting something like "X will pay Y $4000/month for 10 years as a part of the property division in this matter. This is NOT alimony, however, X will cease payments to Y upon Y's remarriage or cohabitation."

Yanno?

 

[OHRoadwarrior]

You were reading that topic incorrectly. It was clarifying what is and what is not alimony. It was not classifying different types of alimony.

 

[mistoffolees]

Then it wouldn't BE alimony, which is what the question was. It would be an effort to 'fool' the IRS into not taxing something that is clearly intended as alimony. Not a game I'd be willing to play, but whatever.

You were reading that topic incorrectly. It was clarifying what is and what is not alimony. It was not classifying different types of alimony.

You're both wrong. It is entirely possible for the parties to call something alimony - and even for the decree to say that it's alimony, but STILL not meet the IRS requirements for taxable alimony. For example, if the payment does not end at death, it is not taxable alimony - regardless of what it's called in the decree.

The point is that the only one who can determine whether something is taxable or not is the IRS. Your advice should be to follow their rules - which are fairly clear and self-explanatory.

OP's question was very simple and very clear:

I've read somewhere in the recent past that a couple can make an agreement that alimony be non-taxable to the recipient and non-deductible for the payor? Is this true, or was I just dreaming it?

The answer is very simple: Yes, it is possible to write an agreement in such a way as to make alimony non-taxable to the recipient and non-deductible for the payor. Simply read the IRS rules. Both you and OHRW were incorrect when you said that it is not possible to do that.

I can't see the IRS letting something like "X will pay Y $4000/month for 10 years as a part of the property division in this matter. This is NOT alimony, however, X will cease payments to Y upon Y's remarriage or cohabitation."

Yanno?

I really don't care what you can see, nor does the IRS. The IRS rules are very clear as I stated earlier. If the payments meet the IRS rules for taxable alimony, then it's taxable alimony. If they don't meet the IRS rules for taxable alimony, then it's not. Regardless of what you think it should be.

 

[CJane]

You're both wrong. It is entirely possible for the parties to call something alimony - and even for the decree to say that it's alimony, but STILL not meet the IRS requirements for taxable alimony. For example, if the payment does not end at death, it is not taxable alimony - regardless of what it's called in the decree.

Right. So, it's NOT alimony if it's (as you suggested) a property settlement.

Per the IRS rules:

Amounts paid under divorce or separate maintenance decrees or written separation agreements entered into between you and your spouse or former spouse will be considered alimony for Federal tax purposes if:

*You and your spouse or former spouse do not file a joint return with each other
*You pay in cash (including checks or money orders)
*The payment is received by (or on behalf of) your spouse or former spouse
*The decree of divorce or separate maintenance does not say that the payment is not alimony
*If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment
*You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse, and
*Your payment is not treated as child support or a property settlement

Not all payments under a divorce or separation instrument are alimony. Alimony does not include:
*Child support
*Noncash property settlements **Obviously does not apply in this case
*Payments that are your spouse's part of community income
*Payments to keep up the payer's property, or
*Use of the payer's property

The point is that the only one who can determine whether something is taxable or not is the IRS. Your advice should be to follow their rules - which are fairly clear and self-explanatory.

And which do not include monthly payments towards a "property settlement". Per your own link.

OP's question was very simple and very clear:

The answer is very simple: Yes, it is possible to write an agreement in such a way as to make alimony non-taxable to the recipient and non-deductible for the payor. Simply read the IRS rules. Both you and OHRW were incorrect when you said that it is not possible to do that.

ALIMONY is taxable. Calling it something else makes it NOT ALIMONY.

OP is asking if they can AGREE THAT ALIMONY WILL NOT BE TAXABLE. The answer is no. They cannot AGREE that ALIMONY is not taxable.

Could they finagle the order to include an alimony-like settlement that was structured so that the IRS wouldn't see it as alimony, and therefore not pay taxes on it? Probably.

Can they write it into their order that alimony will be paid but not taxable? NO.

I really don't care what you can see, nor does the IRS. The IRS rules are very clear as I stated earlier. If the payments meet the IRS rules for taxable alimony, then it's taxable alimony. If they don't meet the IRS rules for taxable alimony, then it's not. Regardless of what you think it should be.

That wasn't even OP's question. Read it again.

OP wants to know if the two people can AGREE that the Alimony will not be taxable. And the answer is... NO. The two parties CANNOT make an agreement that the IRS will not tax their alimony.

 

[mistoffolees]

Right. So, it's NOT alimony if it's (as you suggested) a property settlement.

Per the IRS rules:

Amounts paid under divorce or separate maintenance decrees or written separation agreements entered into between you and your spouse or former spouse will be considered alimony for Federal tax purposes if:

*You and your spouse or former spouse do not file a joint return with each other
*You pay in cash (including checks or money orders)
*The payment is received by (or on behalf of) your spouse or former spouse
*The decree of divorce or separate maintenance does not say that the payment is not alimony
*If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment
*You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse, and
*Your payment is not treated as child support or a property settlement

Not all payments under a divorce or separation instrument are alimony. Alimony does not include:
*Child support
*Noncash property settlements **Obviously does not apply in this case
*Payments that are your spouse's part of community income
*Payments to keep up the payer's property, or
*Use of the payer's property



And which do not include monthly payments towards a "property settlement". Per your own link.



ALIMONY is taxable. Calling it something else makes it NOT ALIMONY.

Absolutely, totally, 100% false. See below.

OP is asking if they can AGREE THAT ALIMONY WILL NOT BE TAXABLE. The answer is no. They cannot AGREE that ALIMONY is not taxable.

Could they finagle the order to include an alimony-like settlement that was structured so that the IRS wouldn't see it as alimony, and therefore not pay taxes on it? Probably.

Can they write it into their order that alimony will be paid but not taxable? NO.




That wasn't even OP's question. Read it again.

OP wants to know if the two people can AGREE that the Alimony will not be taxable. And the answer is... NO. The two parties CANNOT make an agreement that the IRS will not tax their alimony.

You are very confused. There is a difference between alimony and 'taxable alimony'. The IRS has rules for when alimony becomes taxable. In most cases it is, but it is entirely possible to write an alimony agreement which would not be taxable. See the link above. It states that certain payments "will be considered alimony for Federal tax purposes if:". That clearly indicates that there are other types of alimony. Federal tax purposes defines whether alimony is taxable or not, but it is entirely possible to have alimony which does NOT fall under Federal tax guidelines. You want to say that if it's not taxable it can't be considered alimony. That is incorrect.

For example:
http://www.wwwebtax.com/income/alimony_payments.htm
"Alimony received is generally taxable income on the recipient's tax return in the tax year it is received; but there are exceptions."
This confirms that not all alimony is taxable.

As I said before, the easiest one would be to write the agreements stating that alimony would continue after death of one or both parties. That would automatically make it non-taxable even though it would still be called alimony.

Once again, OP asked: "I've read somewhere in the recent past that a couple can make an agreement that alimony be non-taxable to the recipient and non-deductible for the payor? Is this true, or was I just dreaming it?"

The answer is clearly 'yes' if the alimony agreement is not yet written or can be modified. They simply write the agreement in such a way that it does not fall under the IRS 'taxable alimony' rules.

If they agreement is already written and is not modifiable, then they obviously can't change it - and have to look at IRS rules to see if it's taxable or not.

 

[Bali Hai]

You are very confused. There is a difference between alimony and 'taxable alimony'. The IRS has rules for when alimony becomes taxable. In most cases it is, but it is entirely possible to write an alimony agreement which would not be taxable. See the link above. It states that certain payments "will be considered alimony for Federal tax purposes if:". That clearly indicates that there are other types of alimony. Federal tax purposes defines whether alimony is taxable or not, but it is entirely possible to have alimony which does NOT fall under Federal tax guidelines. You want to say that if it's not taxable it can't be considered alimony. That is incorrect.

As I said before, the easiest one would be to write the agreements stating that alimony would continue after death of one or both parties. That would automatically make it non-taxable even though it would still be called alimony.

Once again, OP asked: "I've read somewhere in the recent past that a couple can make an agreement that alimony be non-taxable to the recipient and non-deductible for the payor? Is this true, or was I just dreaming it?"

The answer is clearly 'yes' if the alimony agreement is not yet written or can be modified. They simply write the agreement in such a way that it does not fall under the IRS 'taxable alimony' rules.

If they agreement is already written and is not modifiable, then they obviously can't change it - and have to look at IRS rules to see if it's taxable or not.

If payor spouse does not claim the taxable alimony payments as a deduction on their income tax returns and alimony payee doesn't either, why should the IRS care? Seems like a wash.

However, if payor spouse claims the deduction and payee spouse does not report the income, the IRS potentially loses money.

 

[mistoffolees]

If payor spouse does not claim the taxable alimony payments as a deduction on their income tax returns and alimony payee doesn't either, why should the IRS care? Seems like a wash.

Actually, it would generate extra income for the IRS if neither party claims it. The payor is likely to have a higher tax rate than the recipient.

But that's not why the IRS cares. They want the rules to be rigid and enforceable so that they don't have everyone who should be paying taxes on taxable alimony skipping out.

 

[LdiJ]

Absolutely, totally, 100% false. See below.



You are very confused. There is a difference between alimony and 'taxable alimony'. The IRS has rules for when alimony becomes taxable. In most cases it is, but it is entirely possible to write an alimony agreement which would not be taxable. See the link above. It states that certain payments "will be considered alimony for Federal tax purposes if:". That clearly indicates that there are other types of alimony. Federal tax purposes defines whether alimony is taxable or not, but it is entirely possible to have alimony which does NOT fall under Federal tax guidelines. You want to say that if it's not taxable it can't be considered alimony. That is incorrect.

For example:
Alimony, IRS and Tax
"Alimony received is generally taxable income on the recipient's tax return in the tax year it is received; but there are exceptions."
This confirms that not all alimony is taxable.

As I said before, the easiest one would be to write the agreements stating that alimony would continue after death of one or both parties. That would automatically make it non-taxable even though it would still be called alimony.

Once again, OP asked: "I've read somewhere in the recent past that a couple can make an agreement that alimony be non-taxable to the recipient and non-deductible for the payor? Is this true, or was I just dreaming it?"

The answer is clearly 'yes' if the alimony agreement is not yet written or can be modified. They simply write the agreement in such a way that it does not fall under the IRS 'taxable alimony' rules.

If they agreement is already written and is not modifiable, then they obviously can't change it - and have to look at IRS rules to see if it's taxable or not.

Misto, you have it a little backwards. The IRS has rules as to when alimony is "deductible", rather than taxable. If its deductible to the payer then its automatically taxable to the payee, as a transfer of income.

If someone chooses not to deduct alimony, then they are paying taxes on that money themselves, therefore it would not be taxable to the payee. The IRS doesn't expect both parties to pay income tax on the same money, and quite frankly, if the higher earning taxpayer is the one paying the tax, then that's to the benefit of the government. However, if it was more than 13k per year then one might get into gift tax issues.

What I cannot fathom...and I have been mulling it around for a while now, is what could motivate someone to choose to NOT deduct alimony...or for two people to make that agreement.

 

[mistoffolees]

Misto, you have it a little backwards. The IRS has rules as to when alimony is "deductible", rather than taxable. If its deductible to the payer then its automatically taxable to the payee, as a transfer of income.

It doesn't matter. If it's deductible for the payor, then it's taxable to the recipient and vice versa.

The point is that it is entirely possible to have alimony that can not legally be deducted and can therefore not be considered taxable income to the recipient.

If someone chooses not to deduct alimony, then they are paying taxes on that money themselves, therefore it would not be taxable to the payee. The IRS doesn't expect both parties to pay income tax on the same money, and quite frankly, if the higher earning taxpayer is the one paying the tax, then that's to the benefit of the government. However, if it was more than 13k per year then one might get into gift tax issues.

What I cannot fathom...and I have been mulling it around for a while now, is what could motivate someone to choose to NOT deduct alimony...or for two people to make that agreement.

It doesn't make sense to me, either. Even if the payor wanted to be nice to the recipient, they would be better off to agree to a higher amount of alimony and go ahead and deduct it (for payor) and declare it (for recipient). As long as the payor is in a higher tax bracket, this would make more sense.