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Posted on May 22, 2019

Jeffrey B. (Jeff) Travis

TAXABLE ALIMONY

On April 15, 2019, a client calls me to ask this question:

“I was divorced in November 2018. I receive alimony of $120,000 per year for the next 10 years and I will have investment income (interest and dividend income) of $80,000 per year. These are the only sources of income I will have. I would like to fund the maximum traditional deductible IRA. Can I fund the maximum IRA and deduct the IRA?”

At first glance, most accountants and lawyers would think not because these two sources of income are NOT EARNED INCOME.

However, there is a special rule that permits you to build retirement savings in an IRA even if you rely on alimony for your support. To qualify, the alimony must be paid under a divorce decree or separation agreement entered in before December 31, 2018.

So, even if you do not work, your alimony received is sufficient to meet the compensation requirement. The rule applies only to taxable alimony income, though. You cannot include nontaxable items such as child support.

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