Alimony Results In Higher Tax Bill

Added December 21, 2006 by Ilyce R. Glink

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Summary: A man is recently divorced and trying to figure out what his tax bill will look like. He sold his home with his ex-wife, but shouldn't have to pay capital gains taxes. The man will have to pay increased income tax on any alimony he receives.

Q: I was recently divorced and my ex-wife -- or second wife, as I like to call her -- and I have sold our house. We each received $20,000.

In addition to that cash, I'm scheduled to receive $1,000 per month in maintenance payments from her. I earn $43,000 dollars each year. How much extra tax will I face next year because of this extra cash.

I assume we'll both file as single individuals. Who should help me work through these issues?

A: If you and your wife lived in your house as your primary residence for at least 2 of the last 5 years, the two of you are each entitled to keep up to $250,000 in profits tax free from the sale. There shouldn't be any taxes owed on the $20,000 in profits you received. Regarding your $1,000 in monthly maintenance, this is also known as alimony. Alimony payments are usually tax deductible by the payor (your ex-wife) and taxable to the payee (that's you).

So if your annual income this year was $43,000, and you got $2,000 extra from your ex-wife this year, it shouldn't change your tax picture too much come April 15. But next year, you'll receive $12,000 on top of your $43,000 in salary. That may change your tax bracket for the taxes you'll pay on April 15, 2008.

Please talk to your tax advisor (you'll probably want to use one this year) to find out this income will show up on your income tax form or if you file your own tax return, you can use a tax preparation software to estimate the taxes you would have to pay with the $12,000 increase in your income.

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