Payments need not be periodic, but there are dollar limits and “recapture” provisions. Even if payments meet all of the alimony requirements, the couple may designate in their agreement or decree that the payments are not alimony, and that designation will be valid for tax purposes.
One of the main sources of discrepancies lies with the distinctions between child support and alimony. For example, an individual is required to pay $1,500 per month to a former spouse, with the provision that the payment decreases to $1,000 per month when the couple’s child reaches age 18. In this situation (see #6 above), the alimony is only $1,000, and the $500 is nondeductible/nontaxable child support.
Reporting the incorrect amount will undoubtly lead to an IRS inquiry since the one making the alimony payment must include the Social Security Number (SSN) of the recipient, and the IRS computer matches the income and deduction reported on the respective tax returns. A resulting examination could end with the assessment of tax and filing penalties for the individual declaring the incorrect amount. If the alimony payer reports an invalid recipient SSN, or fails to include it altogether, the IRS may assess a penalty, even if the recipient has properly reported the alimony income.
Those receiving alimony may not be aware that alimony is treated as earned income for purposes of making IRA contributions.
If you are concerned that the amount you are declaring or deducting as alimony might be incorrect, or are currently involved in a divorce action, and would like to understand the tax ramifications of alimony, child support and who will receive the tax benefits provided for your children, please call your local Enrolled Agent.
Robert Cantu is a Santa Paula Enrolled Agent-National Tax Practice Institute Fellow and member of the American Society Tax Problem Solvers, licensed by the US Department of the Treasury to represent taxpayers before the IRS in audits, collections and appeals. As a Director of the local chapter of the California Society of Enrolled Agents, he is actively involved in the tax profession at the local, state and national levels.