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Understanding tax implications involved with alimony

When a couple decides to part ways, there are numerous serious issues to consider. Ending a marriage is not a simple task, but some divorcing couples complicate matters more by not addressing all the necessary and critical components of dissolution. When establishing alimony, during the divorce process, for example, the spouses should consider the short-term and long-term affects of this arrangement.

Spousal support can be a crucial decision to make during the divorce process. When establishing a payment plan, the divorcing spouses need to consider how providing financial support to an ex will affect them in the future. In addition, overlooking the tax implications could result in an ex-spouse being very surprised and upset.

Because alimony is deductible for the payer, this results in lower tax liability. This also means that the recipient must include the alimony payments as received income. If the two amounts do not align, the ex-spouses could face an audit. Although basic communication during tax time would help prevent such issues, several divorced couples make this serious error.

There is a gap of nearly $2.3 billion between the deductions for alimony claimed and the corresponding income reported. To solve these inconsistencies, the IRS will seek documentation to verify the amounts that the ex-spouses reported.

To avoid tax issues, divorced couples need to properly communicate the amounts claimed for spousal support. Although some couples do not have a good relationship post-divorce, being able to put their differences aside to communicate this vital information could greatly benefit both parties.

Dealing with post-divorce issues such as alimony can be complicated. Those seeking to alleviate any legal issues concerning spousal support should understand their options so that they can take appropriate steps.

Source: Fox Business, "The Tax Rules of Alimony," Bonnie Lee, June 12, 2014

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