Know the tax difference between alimony and child support

Divorce is a sad experience for all concerned.  The last thing you want to think about is taxes, but tax issues are important.  If you fail to negotiate your divorce settlement with taxes in mind, you may regret it for years to come.  One important tax issue is whether you call support payments alimony or child support.

Alimony is taxable; child support is not.  Alimony or separate maintenance payments are payments made by one spouse to help support the other.  Generally, alimony payments are deductible by the person paying them, and they are taxable income to the person receiving them.  Child support payments, on the other hand, are neither deductible by the payer nor income to the recipient.  So what's best tax-wise depends on whether you are the payer or the recipient of the payments.

Negotiate with taxes in mind.  Alimony can sometimes lead to combined tax savings.  If the spouse making the payments is in a higher tax bracket than the recipient, the value of the tax deduction will be greater than the taxes owed.  Both parties may be able to share the benefit if the value of this tax saving is anticipated when payments are negotiated.

Avoid this tax trap.  Beware of trying to disguise child support or property transfers as alimony just to gain the tax deduction.  The IRS can disallow the tax deduction in such cases.