It seems simple enough, but one basic tax law principle is often ignored or misinterpreted by emotional taxpayers going through a divorce: Alimony payments are tax deductible while child support payments are not. Correspondingly, alimony payments are taxable to the recipient, while amounts paid for child support are tax free to the recipient.
Strategy: Be aware of the ramifications while you’re negotiating the divorce. Then make sure the decree properly reflects the tax intentions.
Note that the mere fact that payments are characterized as “alimony” by both sides doesn’t ensure that it will be deductible. To qualify as deductible alimony, the following tax-law requirements must be met:
- The payment must be made in cash or its equivalent
- The payment must be received by (or on behalf of) a spouse under a divorce or separation agreement
- Such an agreement cannot designate the payment as being nontaxable to the recipient spouse and nondeductible by the payer spouse
- The payer spouse and the recipient spouse cannot be members of the same household at the time of the payment
- There is no liability to make a payment for any period after the death of the recipient spouse or to make a substitute payment in such a situation
- The spouses cannot file a joint tax return with each other in the year of the payment.
Tip: Work out the best tax deal you can under the circumstances.