Distinguishing Alimony from Child Support
Divorce is never easy. No matter the reason there are almost always emotional and financial implications. Included in those are several tax considerations that must be addressed. My next couple of articles will outline some of the tax situations that arise as the result of divorce. This article will provide an overview of alimony and support payments.
In the context of a divorce or separation, one spouse may be required to make support payments to the other. The tax consequences of these payments depend on whether the support is intended for the recipient spouse or for the children who are in the custody of the recipient spouse.
State law requires that parents provide support for their children, and money expended on such support is generally not tax deductible. Consequently, it does not matter whether the support is being paid to various suppliers of goods and services when a child resides with the taxpayer, or if the payment is made to the custodial parent for this purpose. In either case, payments for the support of a child do not generate a tax deduction. Likewise, such amounts received by the custodial parent do not constitute taxable income to the recipient.
Payments for the support of an ex-spouse, however, are a different matter. These payments are considered alimony and are deductible by the payer spouse and includible in the income of the recipient spouse. It is crucial, therefore, that alimony payments be properly identified. There five requirements for a payment to be considered alimony.
First, the payment must be in cash, not in services, or property, or a debt instrument. Second, the payment must be made to, or on behalf of a spouse, pursuant a divorce or separation instrument. A “divorce or separation instrument” is either: (1) a decree of divorce, a decree of separate maintenance or a written instrument incident to a decree of divorce or separate maintenance; (2) a written separation agreement; or (3) a decree of spousal maintenance. A “decree” is basically a court judgment. A written instrument is “incident to a decree” if it is related to it.
Note also that the payments must be made to the spouse or a designated third party if the payment is made on behalf of the spouse. Such designation must be provided in the divorce or separation instrument. For example, the divorce or separation instrument may provide that the payer spouse make payments directly to the creditors of the recipient spouse.
The third requirement of alimony is that the divorce or separation instrument cannot specify that the payments are not alimony. If the instrument specifies that the payments are not alimony, the recipient must attach a copy of the instrument to his or her tax return for each year in which the designation applies, otherwise the recipient will be taxed on the income.
The fourth requirement is that the spouses must not share a household when the payments are made. Payments made while the couple lives together in the same household will not qualify as alimony. However, payments made while the one spouse is preparing to depart and in fact departs less than one month after the date of payment may still be considered alimony.
The fifth and final requirement of alimony is that the divorce or separation instrument must provide for the termination of alimony payments upon the death of the recipient spouse. For example, if the divorce instrument requires A to pay B $10,000 in cash annually for ten years, but does not specify that the payments will terminate upon B’s death, none of the payments will be treated as alimony for federal tax purposes. Furthermore, just because payments actually do cease before the recipient’s death does not mean this criteria is met.
As always feel free to contact me with any comments or question.