How is a lump sum settlement to end alimony taxed - alimony income or property settlement?

Thanks for the information! The divorce was actually finalized back in 2014, so it sounds like it would fall under the pre-2019 rules. The settlement document they signed when agreeing to the lump sum payment doesn't specifically call it a "property settlement" - it just refers to it as a "final settlement of all spousal support obligations." Does that phrasing help determine how it should be treated? And if it is considered alimony for tax purposes, would she need to report the entire $195,000 as income in a single tax year, or is there some way to spread that tax burden out?

The phrasing "final settlement of all spousal support obligations" strongly suggests this would be treated as alimony under the pre-2019 rules, making it taxable income to your mother-in-law. The IRS generally looks at the substance of what's being settled, and in this case, it's clearly in lieu of continued alimony payments. Unfortunately, she would likely need to report the entire $195,000 as income in the tax year she received it. The tax code doesn't typically allow for spreading this kind of lump sum payment across multiple years unless specifically structured that way in the agreement. This could potentially push her into a higher tax bracket for this year, which is one of the downsides of lump sum settlements.

How exactly does this taxr.ai thing work? Do you just upload your documents and it gives you tax advice? Is it actually accurate or is it just another AI that makes stuff up? Seems too good to be true for complicated tax situations.

Did it help you find any deductions or credits to offset the tax hit from receiving a large lump sum? That's what I'd be most worried about - getting pushed into a higher bracket and losing a huge chunk to taxes all at once.

The way it works is you upload your tax documents (like settlement agreements, W-2s, 1099s, etc.) and it extracts the relevant information and applies the appropriate tax rules. It's not just making stuff up - it cites specific tax code sections and IRS rulings. I was skeptical too but the advice matched what a CPA later told me, except I paid way less. As for offsetting the tax hit, it actually did suggest several strategies. In my case, it recommended increasing my retirement contributions that year to reduce my adjusted gross income and looking into whether I qualified for certain credits based on my new financial situation. It also explained how the tax would be calculated so I could plan ahead rather than being surprised at filing time.

How exactly does this work? Do they just connect you to the IRS faster somehow? Is it just for tax issues or can you use it for other government agencies too? I've been trying to reach someone about my amended return for months.

Yeah right. Nothing gets you through to the IRS faster. This sounds like a scam that just takes your money and gives you the same hold time everyone else gets. I've tried "priority" services before and they never work. The IRS phone system is completely broken and nothing can fix it.

It works by using an automated system to navigate the IRS phone menus and hold on your behalf. When an agent actually answers, Claimyr calls your phone and connects you directly to the IRS agent who's already on the line. It's specifically for the IRS, but I think they might work with some other agencies too. The service doesn't give you "priority" in the queue - you're still in the same line as everyone else. The difference is their system waits on hold instead of you having to do it personally. For my amended return question, I just selected the option I needed, went about my day, and got a call back when an agent was actually available to talk. No more wasting hours listening to that terrible hold music!

That's an interesting point I hadn't considered. The original divorce decree was from 2014, but the agreement for the lump sum payment was actually signed in October 2024. Would that count as a modification that could change how the payment is taxed? It wasn't changing the terms of the original alimony exactly, just replacing future payments with a single payment.

That October 2024 agreement could absolutely be considered a modification that might bring this under the newer tax rules. The key test is whether the modification expressly states that the TCJA rules should apply to the payments. If the 2024 agreement is silent on which tax rules apply, then generally the original tax treatment from the 2014 decree would continue. However, if the new agreement specifically references the tax treatment or states that it's a "complete replacement" of the prior agreement, you might have grounds to treat it under the newer, more favorable tax rules where alimony isn't taxable to the recipient.

Income averaging on Form 4972 is only available for certain pension and retirement distributions. It wouldn't apply to alimony payments, unfortunately. The old "income averaging" provisions for other types of income were repealed years ago.

This is really helpful advice! I'm completely new to dealing with tax situations this complex, so I appreciate the clear breakdown. The retirement contribution strategy is something I hadn't thought of - would she be able to make contributions to an IRA at her age if she doesn't have earned income besides this lump sum payment? Or are there other types of retirement accounts that might work? Also, when you mention consulting with a tax professional, do you think it's worth the cost given that we already have a pretty good sense that this will be taxable income? I'm trying to balance getting proper advice with not spending unnecessarily on professional fees, especially since this payment is going to result in a significant tax bill already.

Great question about retirement contributions! Unfortunately, alimony income (even lump sum payments) generally doesn't count as "earned income" for IRA contribution purposes. She would need wages, self-employment income, or other earned income to make traditional or Roth IRA contributions. However, if she has any part-time work or consulting income - even a small amount - that could open up IRA contribution opportunities. Also, if she's married and files jointly with a spouse who has earned income, she might be able to make a spousal IRA contribution. Regarding the tax professional consultation, I'd actually lean toward saying it's worth it in this case. With a $195,000 taxable event, even saving a few percentage points on the tax rate or finding legitimate deductions could easily pay for the consultation fee. A good tax pro might also spot planning opportunities you wouldn't think of, like timing other income/deductions around this payment or identifying state tax implications. Given the size of the payment, the cost of professional advice is probably a drop in the bucket compared to the potential tax liability.

This is really valuable insight, thank you! I hadn't considered getting a tax attorney's written opinion, but you're absolutely right that with this much money involved, it's worth making sure we're not missing anything. The idea about timing investment losses to offset gains is particularly interesting - that's definitely something I wouldn't have thought of on my own. Do you mind me asking how you found a good tax attorney? Did you go through a regular law firm or look for someone who specializes specifically in divorce-related tax issues? I want to make sure we find someone who really understands these alimony buyout situations rather than just a general tax preparer. Also, did the attorney end up finding any alternative ways to characterize the payment, or did it ultimately get treated as taxable alimony income as expected?