Estimating Taxes on Alimony

Today's tax question comes from Meenu. She asks:

"Hello. My husband and I filed for a divorce last year. It will be done in April 2006. I was a homemaker in 7 years of our marriage. So he gave me a lump sump amount as alimony. I don't know how to figure out what taxes I owe on that amount.

From what I have understood by reading online --- If I want to file for an extension, I have to fill out FORM 4868 . I don't know what I should fill out for PART II section on that form with the following:

1. Estimate of total tax liability of 2005 -- Should I ask my ex husband about this?
2. Total 2005 Payments -- I am going to school right now and am doing a job as a tutor that gets me around $700 (average)/month.
3. Balance due

I have never done taxes before. I am trying to read online, but I am feeling more and more overwhelmed. Hope to get some guidance. I really would appreciate all your help. Thanks, Meenu."

I have an easier idea for you. Just print out Form 4868, fill in your name, address, and SSN, and mail it in. True, it is better to pay your estimated tax bill with this Form, but it may not be possible to estimate what your tax bite will be before April 17th. If you prepare your taxes after April 17th, and it turns out you have a balance due, the IRS will add on penalties and interest.

Filing an extension, however, eliminates the failure to file penalty (5% per month), but you'll still be left with the failure to pay penalty (0.5% per month).

You should review IRS Publication 504, the IRS' tax guide for divorced and separated individuals. In particular, the chapter on Alimony. The publication states that,

"Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument."

So if you don't have a divorce decree or separate maintenance agreement yet, then any payments made to you by your ex-husband are not consider alimony. In fact, lump sum payments are often treated as distributions of jointly owned property. It is highly likely that this money is not considered taxable income to you, and therefore you might not owe any taxes at all. For example, this is what the IRS says about lump sum payments:

"Property settlements, whether in a lump sum or installments, even though required by the divorce decree or other written instrument or agreement, do not qualify as alimony. Any payments not required by such a decree or agreement do not qualify as alimony." Source: IRS Tax Topic 452.

So, what I suggest, is that you file Form 4868 using only your name, address, and SSN. That will give you an extra six months to figure out what your tax situation was for last year. You should be sure to ask your attorney if the lump sum payment was considered a "property settlement" (non-taxable) or "alimony" (taxable).

Throughout the tax season I will be answering one tax question per day. Do you have a question? Visit the Ask a Tax Question page. Disagree with my answers? Post your comments in the Tax Forum.