“Are alimony and child support taxable? If so, is there any way of structuring support payments to my ex to lower my taxes?”
Where one spouse is to be making support payments to the other upon divorce or separation, the payments are deductible by the payer and taxable to the payee if they qualify under the tax rules for “alimony.” To qualify, the parties must be living in separate households, and the payments must be:
required under the divorce decree or separation agreement (i.e., voluntary or “extra” payments won’t qualify),
in cash only (not goods or services), and
required to end at the death of the recipient spouse.
The parties can elect to have payments that qualify be treated as not qualifying (but not vice versa).
Child-support payments aren’t deductible by the paying spouse or taxable to the recipient. These include payments specifically designated as child support as well as payments which otherwise might look like alimony but are linked to an event or date related to a child. For example, say a spouse is to pay “alimony” of $3,000 a month, dropping to $2,000 a month at a specified date. If the date coincides with a child’s 18th or 21st birthday, the “extra” $1,000 will be characterized as child support and will neither be deductible by the paying spouse nor taxable to the recipient spouse.
Tax planning for support payments generally seeks to make them deductible if the paying spouse is in a higher tax bracket than the recipient, as is often the case. The tax savings for the paying spouse can be shared with the recipient through higher payment amounts or other benefit provisions. For example, if having payments qualify as alimony will save the paying spouse $5,000 in tax but will cost the receiving spouse $2,000 (determined by multiplying the alimony amount by the individual’s marginal income tax bracket), the paying spouse can offer additional payments in the divorce negotiations to cover the recipient’s tax cost and a share of the additional tax savings.
Since alimony payments are required to end at the death of the receiving spouse, as noted above, the parties may wish to provide for life insurance for that spouse as part of the arrangement.
Phil Shechter is a Certified Public Accountant (CPA) and senior partner at Berenfeld in Miami. He has been practicing accounting since 1982.