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Essentially, alimony is taxable, while child support is not. Alimony is tax-deductible for the person paying it, and it is considered taxable income for the recipient. Child support does not count as income for the recipient, and is not tax-deductible for the person paying it (payer).
When divorced spouses have similar incomes, it is in the payer’s best interest to meet his or her financial obligation to the recipient by paying as much of it as possible in the form of alimony rather than child support so that he or she can deduct it. On the other hand, it is in the recipient’s best interest to receive the money in child support so that he or she doesn’t get taxed on it.
However this can change in divorces where one spouse has a much higher income than the other. When the recipient is in a lower tax bracket than the payer, it may be in the best interests of both divorcing spouses for the payer to pay mostly alimony, the reason being that the amount of money saved by the payer in tax reductions can more than offset the amount of taxes paid by the recipient. This will allow the payer to pay the recipient more, and deduct more while recipient receives a greater amount after taxes. Both spouses come out ahead.
In some cases, the higher income spouse may agree to pay for additional incidental expenses for the lower income spouse, such life insurance, medical insurance, car payments, and mortgage payments. These types of payments sometimes qualify as alimony. In these cases, the payer should take the time to make sure of this.
Consult an Attorney
The government is well aware of the fact that many divorcing couples pass of many different expenses as alimony and has taken measures to curb it, namely the Excess Alimony and Alimony Fixed as Child Support tests. Consult with an experienced divorce attorney to determine which payments can legally be considered alimony.
Considering a divorce? If you are considering a divorce, or would like assistance with any facet of divorce legal proceedings, please contact us today for a free consultation with an experienced divorce attorney who will aggressively defend your best interests.
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