Tax Advantages of Alimony

The tax advantages of using alimony can be so powerful that people going through divorce are tempted to label some payments as alimony when they are really child support or property settlement. The government's response is in the form of two tests:

  • Excess Alimony (front-end loading): Congress recognized the temptation to characterize property settlements as alimony, so the 1984 Tax Reform Act contains provisions calling for the recapture of "excess" alimony (that looks too much like a property settlement). Specifically, the rules provide that if alimony is excessively "front-loaded" (concentrated too much in the first two years of payments), the payor spouse must "recapture" it. (That means the payor spouse must include it in his or her gross income). Divorcing spouses must remember what are called I.R.S. recapture rules. Recapture applies to alimony payments when the alimony paid decreases by more than $15,000 annually within a three-year period after a divorce. If in a three-year period a taxpayer's alimony decreases by more than $15,000 from the amount of the proceeding year, the I.R.S. regards the alimony payments as property distribution and recaptures the obligor's income retroactively. In this, the I.R.S. recovers the tax benefit of a deduction or a credit taken by a taxpayer and disallows the deduction. Recapture prevents a divorcing couple from dividing their property and calling the distribution alimony.
  • Alimony fixed as child support: Alimony cannot be called child support. When the divorce decree or separation agreement identifies a specific amount of continuing support as child support, the amount so designated cannot be treated as alimony. Payments can be characterized as child support even though they are for the support of an adult child. It cannot be changed based on something happening to the child. A payment will be treated as child support to the extent it is subject to reduction on the occurrence of a specified contingency relating to the child getting a job or going to college (Or a child's marrying, dying, leaving home, leaving school, or reaching a certain income. It cannot be changed based on something associated with a change to the child.)



Suggested Reading
The Spousal Support Handbook The Spousal Support Handbook
Spousal support is one of many issues that is often difficult for spouses to agree upon. Before negotiating and even signing an agreement regarding spousal support it is very important that you understand your rights and the repercussions of any actions taken.

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ALIMONY BLUES – Courts are most likely to award permanent alimony in the case of a middle-aged stay-at-home mother who faces a heroically difficult climb to reenter a job market indifferent to her stale job skills. Even though lifetime alimony is raw material for standup comedians in nightclubs, the career homemaker very often needs this protection.
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