Alimony is a regular payment of money from one spouse to the other. It’s paid for an indefinite amount of time, typically only ending when divorce proceedings formally end. If you are paying or receiving alimony, it is best to consult with experienced professionals at a divorce law practice about how this will affect your settlement.
Tax Benefits of Alimony Payments
If you receive alimony payments, part of the payment may be tax-deductible on your yearly return. But if you’re paying alimony, some portion of the cost may be taxable as income to the recipient. Alimony is also treated differently from child support, so it’s essential to understand how taxes will affect your financial situation if you receive or pay alimony.
Of course, you’ll also need to keep careful track of all your business expenses if you’re receiving alimony payments. That way, you can prove to the IRS that a portion of your payment was indeed tax-deductible and not just an attempt to hide your regular income.
How to Manage Your Business Finances and Pay Alimony
If you’re the owner of a business and paying or receiving alimony, there are several steps you can take to ensure that your finances and taxes will remain in order.
First of all, it’s essential to keep detailed financial records. If you operate under a sole proprietorship, an LLC, or other such arrangements for your business ownership, you can typically deduct alimony payments from your taxable income. But you need to prove it to the IRS by showing that your business had financial hardships which caused you to make alimony payments for this to work.
The second way to manage alimony payments if you own a business is to ensure that they are never more than 50% of your adjusted gross income. This way, you can ensure that the government can’t accuse you of trying to hide your income by paying too much in alimony.
If you are receiving alimony payments, it’s also essential to keep careful track of your spending habits and overall finances if you own a business. This will help you prove to the IRS that your financial situation may have been what forced you to accept alimony payments from your spouse.
Strategies for Managing Alimony Payments in the Long Term
If you were in a long-term marriage, you might receive alimony payments for the rest of your life. This can get rather tricky if you have no other sources of income or savings outside of retirement funds. You may want to consider consulting with an experienced attorney about converting the alimony into a lump sum settlement so you can invest in a business or other ways to bring in more income.
Some spouses may refuse to do this, but if your spouse is unemployed or you have significant proof that their financial situation makes it impossible for them to provide lifetime alimony payments, an attorney may be able to work something out with the court.
If they are willing to work with you, they may be able to pay taxes on the lump sum settlement in advance at the end of the year. Or you can use some of your retirement funds to purchase an annuity for them. This way, they will receive payments that will last the rest of their lives and tax them as income, not alimony.
Tips on Dealing with Alimony as a Small-Business Owner
You may not be able to deduct alimony payments from your taxable income if you own a small business and receive spousal support. This is because your business is not considered a separate entity from you as an individual. If this is the case, there are several things you can do to make managing your alimony payments a little easier, such as:
Tip #1 Don’t liquidate assets to make alimony payments
Suppose the IRS audits your financial records and sees that you sold stock or liquidated other assets to make alimony payments. In that case, they may charge you penalties or even seize the money you paid in alimony because it was not considered earned income.
Tip #2 Make changes to your business structure
If you receive alimony or pay spousal support, it’s essential to keep the correct documentation, so the IRS doesn’t think your business is an alter-ego or shell of yourself. You may want to consider consulting with an attorney about changing your business structure to avoid the risk of paying the wrong amount in taxes.
Tip #3 Work with accountants and attorneys
If you still have questions about alimony, it’s a good idea to talk to an accountant and divorce attorney. They can help you navigate the tricky business of alimony payments and ensure you don’t run into any problems with your taxes.
There are plenty of ways to manage alimony payments if you own a business. It’s just important to keep careful track of your finances and consult with experienced professionals who can help you steer the ship.