Alimony
There
are basically three ways in which money or property can change hands
between divorced or divorcing spouses: child
support, alimony, and division of property.
Two of these
methods (child support payments and division of property) are generally
non-events in terms of your taxes. Child support payments don't affect
your taxes at all, unless you fall behind and have your tax refund confiscated to pay child support
in arrears. And property transfers from one spouse to another either
during a marriage, or transfers within one year after the divorce
or pursuant to a divorce or separation agreement, are not taxable
events for either party.
However, alimony is a different story.
Although alimony (also known as spousal support) is generally out
of fashion with most divorce courts, it is still afforded favorable
treatment by the IRS.
Alimony is normally deductible by the
person who pays it, and is taxable income to the recipient. Because
the purpose of alimony is to provide support from a higher-income
person to a lower-income ex-spouse, the person paying alimony will
very frequently be in a higher tax bracket than the person receiving
it. Thus, a tax savings occurs that, in effect, causes Uncle Sam
to pay part of the alimony.
 |
Example John is required by the divorce decree
to pay Mary $1,000 a month in alimony. John is in the 25 percent
bracket, As a result of paying $12,000 of alimony during 2014, John
will reduce his tax liability for the year by $3,000. If Mary is
in the 15 percent bracket, the $12,000 in alimony payments will increase
her tax liability by $1,800. The $1,200 difference between John's
tax savings and Mary's tax increase is, in effect, "paid" by Uncle
Sam. |
|
Because the tax treatment for alimony is more favorable
than that for child support, the IRS has devised a set of rules that
are designed to keep people from treating as alimony those payments
that are really a property settlement or child support:
© 2024 Wolters Kluwer. All Rights Reserved.