Like many other money transfers, spousal support or alimony payments could have federal income tax consequences both for the spouse that pays and for the spouse receiving the payments. The Internal Revenue Code says that alimony payments are tax deductible for the paying ex and must be reported as taxable income by the person receiving the alimony or spousal support.
Both spouses must remember that the federal income tax code has a strict set of guidelines defining alimony. Spouses that fail to follow these very strict guidelines may well find themselves unable to categorize these payments as spousal support or alimony. In Michigan, we use the terms “alimony” and “spousal support” interchangeably. They mean the same thing and judges throughout Mid-Michigan often use both phrases. In Lansing and throughout Ingham, Clinton and Eaton Counties, the term “spousal support” may be a bit more common than alimony.
For federal income tax purposes, alimony and spousal support payments are deductible from the income of the spouse paying and are included as income for the recipient. The word “deductible” for federal income tax purposes means it is subtracted from a payer’s gross income before taxes are calculated, thus resulting in a lower tax obligation to the IRS. Taxpayers with a threshold amount of deductions must file a particular form with the IRS and list such deductions when paying income taxes. Spousal support payments or alimony payments made in Michigan are deductible for federal income tax purposes as long as they are made based on a decree, court order or written separation agreement. In order for alimony payments to be deductible, federal tax laws and the Internal Revenue Code mandate the following:
The payments are made in cash, check or money order (no promissory notes, transfers or use of property, transfer of services, etc.) to the spouse, or to a third party in lieu of alimony at the written request of the recipient spouse, stating the payments are intended as alimony, and the request is received before the tax return is filed;
The divorce decree, order or the written agreement of the parties does not identify the payments as something other than alimony;
The spouses do not file a joint return with one another;
The spouses are not members of the same household when the payments are made;
There is no liability to make the alimony payments after the death of the recipient spouse;
The alimony payments are not treated as child support
Division of Property Tax Consequences
Divorces involve a division of the property owned by the couple. Such a division of property is not usually a taxable event. Said another way, neither spouse owes taxes or gets a deduction from income because he or she receives certain property as a result of the divorce. There are, however, tax issues following divorce that affect future taxes. More specifically, selling personal and real property in the future may require spouses who received the property pursuant to the Michigan judgment of divorce to pay taxes related to that property.
Personal and real property have a “basis” for federal tax purposes. The basis is usually the purchase price of the property. When the property is sold later, the amount by which the sales price exceeds the basis is called “capital gain.” Capital gain is usually taxable at special rates. Currently, capital gains taxes are lower than taxes on ordinary income. Therefore, when property or assets distributed pursuant to a divorce judgment is later sold by the spouse that received them in the divorce, that spouse recipient may be required to pay taxes on the proceeds of the sale.
For example, in a divorce, the wife may receive the family home while the husband might receive stock or other investments equal in value to the house. If the house has a lower cost basis than the cost basis of the stock, when both are sold, the husband could end up with significantly more money, because he owes less capital gains tax. However, your tax advisor will also factor in the significant exemption that is presently given to the seller of a qualified personal residence.
Child Support Tax Consequences
The parent who is granted custody of the child or children from the marriage, normally gets child support. Child support payments are not included in the taxable income of the receiving spouse and are not tax deductible by the spouse making the payments according to present law or the IRS.
If the written agreement or judgment of divorce orders both child support and spousal support and the spouse making the payments pays less than the required total amount for both, for tax purposes, the child support obligation is deemed paid in full first. Only money exceeding the amount of the child support obligation is treated as spousal support for federal income tax purposes.
This information is general in nature and you should never rely on it because Michigan law and federal tax law changes often. You should always rely on your tax advisor and your lawyer to provide you with updated, accurate information about the tax consequences associated with a divorce in Ingham County, Eaton County, Clinton County or Lansing.
For more information regarding Divorce in the state of Michigan, contact the Michigan Divorce Attorneys today! Our phone lines are staffed 24-7, and an attorney is on call! Schedule your initial consultation today by calling (517) 886-1000.