"Alimony is taxable to the recipient and deductible payor." Upon the close of a divorce matter, many parties are either informed of this important fact orally or in the form of a letter or other written notice provided by their attorney. Although this important statement is recited to divorce litigants at the conclusion of their divorce, many parties, especially recipient of alimony, fail to adequately appreciate the gravity of this statement until he or she receives a hefty and unexpected tax bill from the IRS.
Alimony is taxable to the recipient. What this means practically is that those who receive alimony payments are required to pay income tax on any amount received at the end of the tax year. Because alimony is not income derived from employment, no federal tax is withheld from the income amount. Thus, at the end of the tax year, the recipient spouse is solely responsible for paying the tax assessed on the income received.
In order to avoid the potentially devastating situation of receiving a large and unexpected tax bill, alimony recipients should be sure to place aside a set amount of funds each month to be used to satisfy the taxes assessed against this income. Additionally, alimony recipients should consult a financial advisor regarding developing a financial plan specifically designed to address post-divorce financial issues faced by alimony recipients.