Most people think alimony has to be tax deductible for the payor and taxable income for the recipient. Actually, you can elect to have not-alimony. So why would you want to do that?
- When the recipient is in a higher tax bracket than the payor.
- The payor will not get a tax deduction because of a lack of current income or their income is non-taxable.
- The alimony payments are front-loaded so that the payor would get slammed with excess alimony recapture in later years.
- When the alimony is being used for property settlement and the recipient can’t talk the payor into grossing up the alimony checks to cover the income tax on the payments.
Even though a couple can elect-out of taxable alimony, they cannot elect-in to taxable alimony. For payments to be treated as taxable and deductible alimony, the payments have to meet all of a list of IRS requirements.