Divorce can be an expensive life event. It is important that you consider your long-term financial interests as you finalize your divorce. To ensure you protect yourself, you need to take into account the tax implications of the different options available.
Maintenance, which used to be called alimony, is one element of your divorce that can affect your tax situation.
- If you pay maintenance: You may deduct these payments on your income tax returns, potentially lowering your overall tax responsibility.
- If you receive maintenance: You must declare this as income on your tax return. You may also, however, be able to deduct the attorney’s fees paid which are directly attributable to you receiving maintenance. You may wish to discuss whether this applies in your situation with your income tax preparer. You will most likely have to keep track of these fees yourself, however, so you should be aware of this from the beginning.
The person who pays alimony is likely to save money on their taxes. And, while the person receiving maintenance does increase their taxable income, this is offset by the benefit of receiving that additional income.
Making Sure Maintenance Is Tax-Deductible
Not all payments made during divorce or separation qualify, for tax purposes, as maintenance. Child support, for example, is different from maintenance and it is not deductible, nor should it be reported as income by the recipient.
Maintenance payments will not be deductible if you:
- Continue to live with your spouse or former spouse while making the payments and the divorce is not yet finalized.
- File a joint tax return.
- Characterize the payments as part of your property settlement or provide non-cash or check payments, such as a property equalization payment or the transfer of an asset such as a car or real estate. This is often called a “maintenance buy-out.”
- Make voluntary payments separate from your divorce decree or separation instrument.
To ensure a payment is considered maintenance by the IRS, pay by cash or check in accordance with your divorce judgment or separation agreement.
An experienced divorce attorney can help you consider the tax consequences of maintenance at the time of divorce or modification. You may also wish to consult further with a Certified Public Accountant.
In Wisconsin, there are no specific guidelines for the court to follow pertaining to maintenance. If you and the other party are unable to resolve a maintenance dispute, the court will make a decision solely within the judge’s discretion based on certain factors set forth under the statutes. This is why it is critical to have skilled legal representation in maintenance matters. An experienced divorce attorney can provide you with all of the possible options when evaluating your maintenance case and how those options may or may not affect your tax situation.