In March 2014, the Treasury Inspector General for Tax Administration (TIGTA) made a startling–and costly–discovery. It found that there was a $2.3 billion dollar discrepancy between the number of alimony deductions made by payers and the amount of income from alimony reported by recipients.
According to TIGTA, about 570,000 taxpayers filed for over $10 billion in alimony tax deductions in the 2010 tax year alone. This should mean that an equal number of taxpayers would claim that same $10 billion as income on their tax return, but only 47% did so–thus giving rise to the aforementioned discrepancy.
This report raises a number of questions. Chief among them is how the federal government defines alimony, what the tax consequences of paying or receiving alimony are, and what the TIGTA report means for former spouses and the public.
What is Alimony?
Known as spousal support in Ohio, alimony is simply a payment made by one spouse, to another, as proscribed by the terms of the couple’s divorce or separation agreement. Generally, alimony is given by a higher-earning spouse to a lower-earning spouse, to help maintain the lower-earning spouse.
According to the IRS, payment is only alimony if several factors are met. These are:
· The couple must not file a joint return together;
· The paying spouse must pay in cash (this includes payment by check or money order);
· The divorce order or separation agreement cannot state that the payment is not alimony;
· The former spouses cannot be living in the same house when payments are made; and
· The payment cannot actually be child support or an award from the division of marital property.
Tax Consequences for the Paying Spouse
Generally, the spouse who is responsible for paying alimony can deduct the number of their payments from their income. This is true under federal tax laws and under most state tax laws. However, state law may allow the parties to modify spousal support awards so that the paying spouse is not entitled to claim payments as deductions.
Tax Consequences for the Receiving Spouse
Under federal and state law, the spouse receiving alimony is supposed to report the payments as earned income. Because taxes are not withheld from spousal support payments, the recipient must plan ahead for possible deductions.
What Does the TIGTA Report Mean for Former Spouses and the Public?
There will likely be no repercussions for spouses who are making their alimony payments as required and properly reporting the amounts on their tax forms. If the amount requested as a deduction was the amount actually paid, there should be no cause for concern.
The recipient spouse is more at risk for penalties. The IRS imposes consequences on individuals who fail to properly report their income. Once the discrepancy is discovered, a notice is sent to the individual, alerting them to why the IRS believes they received more income than was reported. The taxpayer may then choose to agree with the IRS and make the requested adjustments, or may choose to dispute the matter. If the individual does nothing, additional action may be taken against them. Taxpayers who fail to report alimony may thus end up paying more in fines and fees than they would have if they had claimed their income in the first place.
The IRS does not yet have any procedures in place to address the discrepancies between alimony deductions and alimony reported. Because of this, the biggest loser in this scenario is the general public, who loses the benefit of the $2.3 billion that could otherwise be put to use on their behalf.
Contact an Ohio Family Law Attorney
Spousal support is a sensitive issue in any divorce, and the tax consequences of these payments can be complicated. Contact an Ohio family law attorney today if you’re going through a divorce and have questions that you need help answering. The Laubacher & Co. law firm is available for free initial consultations; schedule your appointment at (440) 336-8687