Daily Deduction: Alimony Payments

Whether you want to take the traditional route—where the paying spouse deducts and the receiving spouse includes the payment in his income—or accept the alternative approach, you will need to estimate your taxable income and your spouse’s as well. If you are at the low end of a tax bracket, making an alimony payment may actually save you money. But if your spouse is at the high end of a tax bracket, receiving an alimony payment may actually cost him money. Knowing which result is the most likely to occur will help not just you, but everyone at the bargaining table.

Finally, if you or your ex stop making alimony payments within three years, the IRS may take some of your deductions back. It goes without saying, then, that every alimony agreement should last for at least three years.

So we’ve covered the cash, but what about the house, the car and the retirement plans? Transfers of property between divorcing spouses are usually tax free. This is true even if the property is transferred in exchange for cash or in return for the release of marital rights in other property. There is one restriction though. The transfer must be related to the end of your marriage. To be on the safe side, you should make sure the court includes all of your property transfers in your divorce decree. This provides the IRS with conclusive proof that you should not be taxed on the transfer. And you’re not limited to the Prius (Stock Quote: TM) and your wife’s favorite sofa. The no-tax rule also applies to health savings accounts, Archer medical savings accounts, individual retirement accounts (IRAs) and virtually any other kind of transferrable interest in property.

Be sure to check out the complete archive of Daily Deductions.

Five Ways to Reduce the Cost of a Divorce

What Happens to 529 Plans After Divorce?

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