Q. My husband and I have separated, and pretty much agreed to work everything
out without going to Court. But I would like some information about how
any support we agree upon is taxed.
Child support is not taxable to the recipient, nor is it deductible by
unless a court order or agreement specifies that child and spouse support
will be paid together as Family Support.
Spousal support, or "alimony" as it is known in some states,
is taxable to the recipient and deductible to the payor as long as certain
Internal Revenue Code requirements are met. It is important that you obtain
a professional explanation and review of these requirements in terms of
what you write up in the settlement agreement (the agreement should be
filed with the Court), because in some situations people have the highly
unpleasant surprise of believing their support agreement passes muster
only to find years later that it violated one of the provisions of the
IRC - if that happens, the paying spouse may be forced to recapture the
deductions in such a way that they are denied by the IRS, which now means
not only that the payor owes monies for increased taxes, but they also
owe substantial penalties.
To be deductible spousal support must meet the requirements of
IRC section 71. These were established by the Domestic Relations Tax Reform Act of 1984,
also known as DRTRA (pronounced "durtra"). The general requirements
are that the spousal support obligation must be set forth in a written
instrument (i.e., a Marital Termination Agreement), the payments must
terminate at death, the payments must be in cash (and not as a swap of
property, although it is possible to structure a property settlement in
periodic payments of spousal support if done properly), and the parties
must reside in separate households.
A common mistake includes "front-loading" or concentrating spousal
support in the period immediately after divorce. Spousal support awards
that decrease by no more than $10,000 per consecutive years are usually
safe, but if you are contemplating a progressive decrease in spousal support
over some years, you must have this agreement examined by a qualified
professional in order to assure you are protected - this could be an accountant.
A common inadvertent mistake is to terminate spousal support on a date
coinciding with a child's age of majority (turning 18). The IRS views
this as an attempt to classify or hide what is really child support as
deductible spousal support, and when this occurs the IRS may declare these
payments that you believed were alimony for tax purposes all to have been
child support - regardless of your true intentions - and so disallow the
deductions from the time of the agreement forward. This will mean that
the receiving spousal who has declared them as income may then be entitled
to file an amended return to recover the taxes he or she paid. (Incidentally,
the way this problem is often brought to the IRS's attention is where
the recipient spouse doesn't declare the income, but you declare the
deduction). There should be at least a six month differential between
the timing of the termination of spousal support and a child's 18th birthday.
These issues can create a real shock, and totally undermine parties'
expectations. Please have your settlement agreement reviewed by a competent
attorney, and seek advice beyond the scope of this Blog in order to safeguard
For more information about tax issues in divorce, click here!
And give us a FB like on the way out?
Thurman W. Arnold III