A How-to Guide for Reporting Alimony on Taxes
Author: Miod & Company
Date: January 6, 2022
Average Time Reading: 5 minutes
If you’re paying alimony to your ex-spouse, they may be tax-deductible. However, not all cases are—depending on your separation date.
On the other hand, ex-couples with deductible alimony often receive a more significant tax return than expected, amongst other benefits. To take advantage of your circumstances, let’s talk about why and how you can use alimony, such as for mortgages.
What is Alimony?
The ex-spouse with the higher income pays alimony to the ex-spouse with a lower or no income.
Many parents prefer to stay home with their children as they grow up and/or lose money. In either case, the lower-earning spouse relies on the breadwinner’s income to live comfortably.
After a divorce or separation, the other spouse will need time to find work, especially if child support is due. The length of your marriage will determine the duration of alimony payments.
The amount of alimony also depends on:
- The spouse’s ability to pay
- Period it takes to find a job or go through the education to attain one.
- Reason for divorce
- Financial needs of both partners
It will depend on your case and the guidelines of your state.
Who Qualifies For Tax Deductions?
Couples divorcing after January 1st, 2019, cannot report alimony payments due to the TCJA (Tax Cuts and Jobs Act).
If you and your spouse divorced before December 31, 2018, you can still deduct expenses, but only if both spouses report them. The paying partner must record alimony, and the receiving partner must report it as earned income.
Not every divorced couple will want to report their alimony, so discuss your alternatives together. It may be advisable to avoid the tax consequences depending on your situation.
How to Use Your Alimony Payments The Right Way?
If your case falls before the January date, then you are set to go, right? Not quite.
To reap the benefits, like qualifying for a mortgage, you will need to provide proof of alimony payments. Because alimony is considered part of your income, you can utilize it to get a mortgage.
If you pay alimony, lenders consider it a debt. It depends on the lender and their policies, but certain common standards exist.
The DTI ratio, for example, shows how much of your income goes toward paying off current debt. Simply divide your monthly debts by the total monthly income to calculate it.
In addition, your DTI percentage should never exceed 50%. Anything above that can ruin your chances with the lender and others in the future.
Before applying for a mortgage, you’ll need to keep track of a few other things:
- Have your proof of income/payments ready
- Know your payment history
- Your credit score and use
- Age of accounts
- Debt amount
- Frequency of credit applications
If you’re going to pay or get alimony after a divorce, be sure it’s in writing. An unofficial arrangement isn’t acceptable for a lender or for tax purposes.
Some examples of what can be used as proof are court decisions, deposited checks, and bank statements. It’s a good idea to keep these records safe and accessible in advance, so they’re ready the next time you need them.
Here to Help
Your mortgage plans may be jeopardized by alimony. Know your DTI and credit score and have proof available for the lender if you utilize them.
We understand if you don’t know where to begin. Missed payments or current alimony arrangements might delay your ability to obtain a mortgage, so knowing your choices is critical.
Contacting one of our professional accountants or advisors at Miod and Company will make this process much more manageable. We are here to help you get you back into the groove of your life!
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