This recent article from The Oklahoman revisits some of the tax issues arising from divorce cases. According to the article and to my surprise, there are many divorcing spouses that do not realize that periodic alimony is included as income for tax purposes (don’t there lawyers explain this to them?). So, because taxes are not withheld, they are surprised in April to find out they owe taxes on all of the alimony received in a given year. The percentage will obviously depend on the recipient’s tax bracket.
My suggestion is to take 25% – 30% of each alimony check received and put it in a separate “tax account” to be used only at tax time to pay this obligation. I also recommend considering an ING Direct online account for this purpose. This account is currently paying 4% APR, which is better than most bank checking or savings accounts, and the money is liquid. Additionally, you link the ING account with your normal checking account and it is easy to make transactions into and out of the account online.
Also remember that if you want more in depth information, go to www.irs.gov and download publication 504, the tax guide for Divorced and Separated Individuals. Or you can access a pdf version here.
If you have any questions about the implications your divorce case will have on your tax situation, discuss it with your CPA or tax planner. The time to have that conversation is before the divorce is finalized.