Florida Alimony: What Are The Tax Implications?
The tax consequences of divorce are often overlooked. A divorce, and any resulting alimony payments, could have significant tax ramifications. It is important that the tax consequences are thoroughly considered throughout the entire process. The last thing you need is an additional headache from the IRS. If you have any questions about spousal support in Florida, contact an experienced Orlando alimony attorney for immediate legal help.
Taxes and Alimony: The General Rules
Unlike with child support payments, alimony payments can be deducted from your annual taxable income. On the flip side, this means that the spouse that receives the alimony payments will be required to add that amount to their annual taxable income. Ultimately, the IRS will still tax that money, it is just a matter of who pays. Sometimes, this could result in one spouse ending up in a different tax bracket. You need to consider any possible effects the payments might have.
Structuring Alimony: Lump Sum Payment
In some cases, a divorcing couple may decide that a lump sum alimony payment structure best meets their individual needs. If the financial resources are available, this option offers the benefit of finalizing the entire alimony process. But, it is critical to understand the tax implications of a lump sum alimony agreement. Once again, this money will all be considered taxable income for the receiving party. Taxes can be complicated, so an experienced alimony attorney should always review your individual circumstances to make sure that the agreement is structured appropriately. There are enough expenses associated with divorce, and a poorly structured alimony settlement may subject you to unnecessary taxes.
The Recapture Rule
The IRS has long been concerned that divorcing couples, in an effort to lower their taxes, will find creative ways to take advantage of the alimony payment system. In response. the agency promulgated the ‘recapture rule’. The rule works like this:
- The first three years of alimony payments are audited;
- The IRS looks to see if the alimony payments have substantially decreased between the first year and the third year; and
- If there was a significant decrease, additional taxes will be assessed to the party making alimony payments.
These additional taxes can be shocking if you are not prepared. The IRS does this because they believe that, in this scenario, the person paying the alimony took an improperly large tax deduction in the first year of payments. Therefore, the agency is attempting to ‘recapture’ that income. This is a prime example of a tax burden that can hit unsuspecting people hard. There are exceptions to the rule, so if you find yourself in this situation, you should speak to an attorney as soon as possible.
Contact An Experienced Orlando Alimony Attorney
At the Law Offices of Steve W. Marsee, P.A. we can take care of all of your family law needs. Going through a separation is always sensitive. Our compassionate legal team understands the that issue but is also prepared to fight aggressively to protect your legal rights. We also make sure that no small detail, such as the tax implications of alimony, is missed. Please contact our Orlando office today at (407) 521-7171 to schedule a consultation.