When a long-term marriage ends, it’s relatively common for the higher-earning spouse to pay alimony to the lower-earning spouse. The spouse receiving alimony will typically use those funds to bridge the gap between current income and living expenses, and will need to know whether taxes are due on those funds. The spouse paying alimony likewise wants to know what the tax implication of the alimony payments are. Continue reading to learn more.
Alimony first came about at a time when women were not part of the workforce in any meaningful way. Wives took care of the home and children, while husbands earned all of the household income. Since a divorced wife had no way to support herself, courts would order the husband to pay the wife alimony so that she could continue living and raising children. Alimony in those times was often permanent, meaning it lasted until the wife remarried, or either spouse died.
Over the 20th century, women joined the workforce in large numbers, and by the end of the 20th century, two income households became the norm rather than the exception.
Until recent decades, alimony was normally payments made by a husband to a wife. Today, in all fifty states and D.C., husbands and wives are both eligible to receive or pay alimony.
Alimony can be in a number of different forms. There’s four types of alimony: temporary alimony, rehabilitative alimony, permanent alimony, and reimbursement alimony.
Temporary alimony is the payment of expenses while the divorce case is pending and can come in many forms. Normally, the higher earning spouse pays money directly to the other spouse, but it often also involves paying bills, the mortgage, car payments, and other living expenses. The higher earning spouse may also have to pay for the other spouse's attorney’s fees. Courts typically don’t allow one spouse to just outspend the other to get an advantage in a divorce case.
Permanent alimony is alimony either for life or until retirement age. Some states have laws that a spouse can’t be ordered to pay alimony past age 65. Some states limit permanent alimony to no more than 10 years. Permanent alimony, in all forms, is becoming increasingly rare across the country.
Rehabilitative alimony is now taking the place of permanent alimony. This type of financial support is only intended to be paid for a period of time, so the supported spouse can obtain additional education or training necessary to get back into the workforce and increase earning ability. Unless the spouse receiving alimony is disabled or at retirement age, the court is going to expect the lower-earning spouse to get a job and become self supporting.
Courts don’t order reimbursement alimony in all jurisdictions, but they do in some states, including New York. In New York, a degree can be considered marital property. For example, if a wife pays her husband’s way through medical school during the marriage and then they get divorced shortly afterwards, the husband can be required to pay the wife back the money she paid for the degree, or a portion of the future expected earnings from the degree.
In jurisdictions like Georgia, a spouse who has student loans can get stuck with the entire debt, depending on when the couple divorces. If a wife gets a degree early in the marriage, and uses that degree to bring money into the household for 10 years, the court may split that debt between the spouses. But if she gets the degree at the end of the marriage, and the degree hasn’t really benefitted the couple, she will probably take the entire debt during property division.
The purpose of rehabilitative alimony—the most common type of alimony that judges award—is to help pay for a financially dependent spouse’s needs following divorce. The spouse receiving alimony may be seeking work or receiving training to increase earning ability. Also, before a court will award alimony, it makes a determination that the paying spouse has the ability to pay the alimony award and still make ends meet. In this sense, the paying spouse is providing a share of income to the receiving spouse until the receiving spouse is financially self-sufficient, and alimony stands as a substitute for the dependent spouse’s income.
The tax implications of alimony follow this logic. It wouldn’t be fair for the spouse paying alimony to also be responsible for paying the taxes on income that doesn't benefit the paying spouse. Similarly, it makes sense that the recipient spouse will pay taxes on the income that benefits only that spouse.
The IRS requires that alimony is tax-deductible for the paying spouse and is considered taxable income for the recipient spouse. For this reason, some spouses will structure their settlement agreement such that instead of the lower earning spouse receiving alimony, that spouse will instead get a larger share of the marital estate, since assets received as a division of marital property does not count as taxable income.
If you have additional questions about the tax consequences of alimony or other property received in a divorce, contact a local family law attorney and/or a CPA experienced in divorce.
