Alimony Looks Good on a Tax Return

Generally, spousal support - alimony - is treated by the IRS as income shifting. It is deductible to the payor and taxable to the payee. As part of their separation agreement, spouses may decide to make the payments nondeductible to the payor and tax free to the recipient.

In most cases, the spouse paying alimony has a lower tax bill. Even better, alimony is an above-the-line deduction, which means it does not have to be itemized to get the tax advantage. Still, there are no tax breaks for lingerers. If spouses continue to share a residence after the divorce, any alimony payments made during that time cannot be deducted. What's more, the payments have to be pursuant to a written separation or divorce agreement, and cannot be considered child support. So couples who are facing extended divorce proceedings due to finances, custody battles, or state laws that require extended periods of separation, may still have trouble qualifying for the deduction.



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INNOCENT SPOUSE RULE -- Section 434(c)(1) of the Internal Revenue Code protects an innocent spouse from tax fraud prosecution under certain conditions. This rule mainly protects women who innocently sign returns while married to men who controlled the finances. An innocent spouse can be protected from liability if 1) a joint return was filed, 2) the return contains a "grossly erroneous" error, 3) he or she establishes "lack of knowledge," and 4) it is "inequitable" to impose the tax on him or her. This rule does not protect the spouse from any legitimate tax obligations for which he or she is responsible under joint and several liability.

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