It is not too soon to begin thinking about how your financial arrangements with your ex- or soon-to-be ex-spouse will affect both of you when filing your 2021 taxes. This is important because the federal tax code changed a few years ago regarding how separate maintenance funds and alimony get treated by the Internal Revenue Service (IRS) at tax time.
Depending on your circumstances and the terms of any separation agreements or court orders referencing your marital status, you might have to deduct payments you made to your ex or claim financial monies received from a former spouse.
Certain requirements must be met
To qualify as payments for separate maintenance or alimony, the following must apply:
- Funds are paid to ex-wives or ex-husbands as part of court-ordered payments for separation or divorce
- Payments are made via cash, check or money order
- After the recipient spouse passes on the debt is canceled
- The former spouses no longer file taxes jointly
- They live in separate households
- Payments aren’t part of a property settlement or made as child support
You don’t want to risk a problem with the IRS by failing to report receiving taxable alimony or separate maintenance payments from your ex.
Get guidance when filing taxes the first year after your split
These new tax implications are likely uncharted territory to couples experiencing their first divorce. But there is no reason why both former partners can’t work together to devise a payment arrangement that provides the most benefits to both parties. Meet with your financial adviser to discuss the tax implications of each potential scenario, then make the best choice.