Alimony obligations are established by the terms of a divorce decree. However, the amount a recipient actually receives may not always correspond with the court order. For instance, a spouse may make partial payments, fall behind on payments, pay more than the required amount, or reach an informal agreement with the recipient to temporarily alter the payment schedule.
When the amount that is paid differs from the amount required under the court order, it can result in a shortfall that affects both parties’ financial positions, which may need to be addressed with counsel. In addition, depending on the date of the underlying divorce agreement (as well as any later modifications), the tax treatment can also be impacted. A tax advisor can help sort through these financial and reporting implications, regardless of whether the alimony payments carry a current tax obligation.
Reasons Alimony Payments May Differ from Court-Ordered Amounts
Alimony payments may differ from the amount specified in a court order for several reasons. In some cases, the paying spouse may intentionally remit less than the required amount because of a change in financial circumstances. In others, the discrepancy may result from an informal agreement between the former spouses, a misunderstanding about the payment schedule, or simply a failure to make payment on time or in full.
Discrepancies can also arise when the parties believe that the alimony obligation has been modified. For instance, the spouses may agree that payments will be temporarily reduced while the paying spouse experienced financial difficulties. But unless there are governing legal documents in place that recognize the new arrangement, the original court-ordered obligation remains in effect.
Overpayments can create a different issue. A spouse may pay more than the amount currently due because the parties have agreed to apply the excess toward future obligations or outstanding arrears. The legal and tax treatment of that additional payment may depend on the terms of the divorce agreement and applicable law.
How a Tax Advisor Can Help Address Alimony Payment Discrepancies
When the amount of alimony actually paid does not match the amount required under the court order, a knowledgeable tax advisor can help identify the financial and reporting issues that need to be resolved. While not every alimony obligation carries tax consequences (depending upon the date of the divorce agreement and any modifications), a comprehensive review of any discrepancies typically starts by confirming whether the payments are subject to tax reporting at all.
Significantly, a tax professional can assist with:
- Reviewing the divorce agreement or court order: A tax advisor can help determine the amount and terms of an alimony obligation, as well as identify any provisions regarding modifications.
- Reconciling actual payments: A tax professional can compare the required payment schedule with bank records, payment statements, and other documentation to determine what was paid.
- Identifying arrears or overpayments: By reviewing financial documents and the court order, a tax advisor can help to evaluate whether the discrepancy represents unpaid support, an advance, a satisfaction of an existing obligation, or another type of payment.
- Determining the applicable tax rules: A tax advisor can determine whether the instrument is governed by the pre- or post-Tax Cuts and Jobs Act federal alimony rules and any subsequent modification affects tax treatment.
A tax professional can also coordinate with legal counsel when necessary. If the parties dispute the amount owed, or an informal arrangement modified the obligation, a court may need to determine the rights and obligations of the parties before any tax consequences can be properly evaluated.
How an Annual Alimony Reconciliation Can Help Identify Payment Discrepancies
An annual alimony reconciliation can help identify discrepancies between the required amount of alimony and what has actually been paid during the year. By comparing the court ordered payment schedule with payment records, a tax advisor can identify potential underpayments, overpayments, missed payments, or payments made outside the expected schedule before the discrepancy becomes more difficult to resolve.
A reconciliation can also provide a clearer record for any necessary tax reporting. Reviewing the court order alongside a party’s payment history can help establish which payments were made and identify whether a subsequent modification or other change in the parties’ obligations might affect tax treatment. Maintaining this documentation is also crucial in the event any questions later arise.
Additionally, for spouses with complex alimony obligations, an annual alimony reconciliation can serve as a useful financial and tax-planning practice. Notably, addressing discrepancies during a reconciliation can help prevent small differences from becoming larger accounting or reporting issues in subsequent years.
Contact an Experienced Tax Professional
Whether you are going through a divorce or the divorce decree has already been issued, a skilled tax professional can assist with understanding the tax and financial implications of alimony. At Rolleri & Sheppard, CPAs, LLP, we offer a wide range of tax, accounting, and financial planning services to help clients navigate all aspects of post-divorce financial matters, including those involving alimony. Contact us online or call (203) 259-CPAS to schedule a consultation to learn how we can assist you.
