Alimony is also known as spousal support. In Ohio, the laws that refer to spousal support are defined as payments made from one spouse to a former or current spouse. It is important to note that the Internal Revenue Service (IRS) uses the term alimony instead. The rest of this article will use the term spousal support.
To ensure deductibility, a written agreement must exist prior to a payment. This does not need to be a court order; a memorandum of understanding between the two parties will suffice. If, for some reason, the parties wish the payment to be non-taxable, it must be stated in the agreement.
It is possible that tax deductions for spousal support can be claimed even before the divorce is final. If a couple knows that their divorce will not be finalized before the year is over, and one spouse is a higher wage-earner than the other, the high earner may wish to generate some tax savings now by beginning to make spousal support payments, with arrangements in place to make sure they will be tax deductible.
Once such an agreement is in place, there are some things that the recipient of spousal support payments should consider when tax-planning, such as tax liability. Because the spousal support is taxable, the payee should determine how the taxes will be paid.
If they are employed, they can try to increase their withholding on wages from that job. But, depending on the level of spousal support, they may never be able to get enough withheld from their wages to cover the taxable spousal support. In that case, they would probably need to make quarterly payments to the IRS for federal taxes, in addition to whatever is necessary for state taxes. In my experience in Ohio, I have not known any cities to tax spousal support, but such a possibility should be investigated.
There are tax-planning considerations for the person making the spousal payments, as well. If the payer is a wage-earner with a W-2, they will need to re-adjust their withholding for federal and state purposes. This is highly recommended since there is no other way for this new deduction to be reflected within the withholding.
For example, it is not unusual for me to tell someone to submit a new W-4 to their employers, indicating that they are single with 30 exemptions. This advice may result in an eyebrow-raising response, but if the exemption amount is going to be very large, the payer must make sure they have the cash flow necessary to make the spousal payments.
Another consideration for the spousal support payer, which is not governed by the IRS but is still important in making the payment arrangements, is timing. The payer should keep in mind the time frame in which they receive their own income. Some people get paid weekly, others bi-weekly, yet others monthly. It is important to make sure there is enough money on hand when the time comes to make the spousal support payment.
For help creating your spousal support agreement, please call me at (614) 429-4172 or me.
Susan A. Moussi, CPA, CFP®, CDFA, CFT SMD Tax & Divorce Financial Planning Consultants, Inc. Phone: 614.429.4172 firstname.lastname@example.org
This entry was posted in Alimony, Blog and tagged Alimony, Federal Taxes, Ohio, SMD Tax & Divorce Planning Financial Consultants, Spousal Support, Spousal Support Payer, Spousal Support Payments, State Taxes, Susan Moussi, Tax Liability, Tax Planning by Susan Moussi.