Child Support Versus Alimony
If you agree to pay "alimony" to your ex, you are certainly counting on being able to write off those payments. Indeed, properly structured payments are deductible on your return (good for you) and are taxable income on your ex's 1040 (bad for your ex). In certain cases, predivorce payments can also qualify as deductible alimony.
In contrast, payments that are deemed to be for child support are a nondeductible expense for you and are tax-free income for your ex. Ditto for any payments that are deemed to be part of the divorce property settlement.
If you are the person making the payments, you naturally want everything to be deductible alimony. You may think all that's needed is for the divorce papers to say your payments are, in fact, alimony. Sorry. It's not anywhere near that simple.
In fact, the federal tax laws set up a gauntlet of complicated requirements, and you must get through all of them. Otherwise, your outlays are nondeductible child support or property settlement payments, no matter what they are called in the divorce papers.
IRS Publication 504 (Divorced or Separated Individuals) probably has the most understandable explanation of all the various rules that must be met to ensure deductible alimony. You can download a copy at the IRS web site. Here's a summary of the most important points.
A common problem is failing to specify that "alimony" payments will cease if your ex dies. If the payments would continue, they are not deductible alimony — regardless of what you intended, how the payments are described in your divorce documents or the fact that your ex turns out to live long enough to collect 100% of the payments. Don't be confused by the fact that alimony payment generally will continue after your death. They become a legal obligation of your estate. That's OK with the IRS and won't affect deductibility.
Another common error is setting up an "alimony" payment schedule that calls for reduced payouts when your children reach a certain age, finish their schooling, get married, become self-supporting, etc. These events are called "contingencies related to a child" in tax lingo. The child contingency rules are extremely complicated. What you need to know is that they can cause some or all of your intended deductible "alimony" to become nondeductible child support.
Finally, if you set up an alimony payment schedule in which the payments drop substantially after the first year or two, you may have a problem with "alimony recapture." If so, you will be forced to pay income tax on the recaptured amount in the third year (your ex will get an equal deduction in that year). To find out if you'll be affected, use our Deductible Alimony Calculator. If necessary, you can adjust the payment schedule until your recapture problem goes away.
Above all, do not rely on your divorce attorney to arrange your deductible alimony payments. Amazingly, many otherwise competent divorce lawyers are woefully ignorant on this subject. So unless your lawyer is also a tax guru (highly unlikely), you should hire a CPA or tax attorney to check out the proposed settlement. If necessary, he or she can suggest changes in the wording to make sure you get your rightful deductions.
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