The most important tax implication of spousal support concerns which spouse claims a deduction. Persons who pay spousal support to an ex-spouse can deduct the amount of the payment from their taxable income. However, persons who receive spousal support must report it as taxable income.
This tax implication only applies to couples who have an order of dissolution of marriage. In other words, if you do not have a court order stating that you are legally separated from your spouse, spousal support payments are considered gifts for tax purposes. Gifts are neither deductible from the paying spouse’s income, nor taxed as part of the receiving spouse’s income.
In addition, the support payment does not have to be itemized in order for the paying spouse to qualify for the deduction.
What qualifies as spousal support under state law is not the same as under federal law. The IRS has a strict definition of spousal support. In order for the paying spouse to take advantage of the tax deduction, the support payment must be:
- In cash
- Authorized by a court order for divorce or legal separation
- Made only while the spouses are not members of the same household
- Terminated upon the receiving spouse’s death
- Proper spousal support (not part of a property division or child support payment)
- Includable in the receiving spouse’s taxable income
By working with your ex-spouse, there are a number of ways in which you can structure the spousal support order to achieve a maximum tax benefit. However, it is very important that you work with a family attorney experienced in tax matters to ensure that you do not violate any IRS regulations.