Financial obligations may not end when a marriage does. Child support and spousal maintenance link some former husbands and wives for years to come. The Internal Revenue Service treats each form of support differently.
Federal tax deductions are not permitted for ex-spouses who pay child support, but deductions are allowed when payments are made for alimony. Child support payments are not taxable for parents who receive them. On the other hand, spousal support is considered income and subject to taxation.
A new report by IRS overseer, the Treasury Inspector General for Tax Administration, noticed a significant disparity between what alimony payers and recipients are reporting. Officials reviewed 570,000 tax filings for 2010 and found $2.3 billion in alimony deductions that weren’t showing up in recipients’ income. Are they honest mistakes?
Many of the errors may have been caused by misinterpretations of divorce agreements, according to the director of Kogod Tax Center at American University. Spousal support and spousal maintenance are terms often used interchangeably with alimony. Poorly worded legal documents can make the boundaries between alimony and other support or marital property distribution blurry.
The Treasury Inspector General’s report stated 47 percent of the reviewed returns had disproportionate alimony deductions and income. Returns from support payers also contained a considerable number of mistakes in recipient identification. Tax IDs, usually a recipient’s Social Security number, were incorrect.
With billions of dollars in tax revenue on the line, the IRS has decided to inspect alimony-related returns closely. The result could mean penalties for an Illinois taxpayer whose alimony claim doesn’t match up with an ex. At least initially, the IRS will not red flag every return that has a wrong tax identification number.
How do Wheaton divorcing spouses avoid an IRS audit over alimony claims? Make sure the wording in the divorce agreement is transparent, so both parties are clear about what is and isn’t alimony.
Source: The Wall Street Journal, “The IRS Cracks Down on Alimony” Laura Saunders, May. 23, 2014