All parents have a legal duty to support their children, and therefore all child support payments made by a parent are not considered income for the other parent receiving them. Because of this, these payments are neither tax deductible by the payer or taxed as income of the recipient.
What Are the Tax Rules Regarding Alimony?
Alimony is treated differently than child support and is considered income by the recipient. The recipient therefore has to include all alimony payments as income and pay taxes on it. The payer receives a tax benefit for these payments, in that they are tax deducible. The paying spouse cannot deduct alimony unless the receiving spouse includes the alimony as income on her (or his) tax return.
Since the payer does not have to pay income taxes on alimony payments, the payer prefers alimony payments to child support payments. Because of this, in some divorce situations the payer will agree to increased alimony payments in exchange for reduced child support. In certain situations this will provide substantial tax benefits. Because of the potential to abuse this benefit, the IRS has established a series of restrictions for characterizing support payments as alimony:
- Authorized by a divorce or separation instrument, such as a court order.
- Instrument must not label payment as non-alimony.
- Cash, check, or money orders only.
- Parties must not be considered part of same household at time payments are made.
- Paying spouse cannot have liability to make payment after death of supported spouse.
- Payment must not be for child support.
The purpose of these restrictions is to ensure that divorcing parties do not label non-alimony payments as alimony for tax purposes. The restriction of alimony to cash, check, or money orders means that the spouses cannot divide property as a means to avoid income tax. Likewise, the rule requiring that payment must cease upon the receiving spouse’s death means that alimony cannot be used as tax-deducted child support
An experienced attorney can help identify potential problems and create the most beneficial payment schedule for both parties.
Are Unallocated Support Payments Considered Alimony?
A difficult problem can sometimes arise when support payments are ordered or agreed upon where the payment is not divided among child support and alimony. The question arises whether this payment is deductible pay by the payer and must be counted as income of the recipient. This determination can make a significant impact on the taxes of each party. Whether these payments constitute alimony will depend on the specific facts and wording of the divorce decree of each situation. In most cases, these payments will probably be considered alimony and thus taxable income to the recipient.
Do I Need a Lawyer?
The rules regarding tax law and IRS rules and regulations are very complex and difficult to follow. An experienced tax attorney can help you determine the tax implications of any support payments that you are either making or receiving. If you are seeking a divorce, a family lawyer can advise you on the best way of setting up support payments to take advantage of tax laws, or possibly help you alter an existing support schedule. A lawyer can also represent you in court if needed.