Don Read, Tax Law for Family Law Attorneys

Spousal and family support are generally deductible as "alimony" by the payor and taxable to the recipient. Child support is generally nondeductible and nontaxable.

"Alimony" is a cash payment made to (or to a third party on behalf of) a spouse or former spouse under the requirements of a "divorce or separation instrument." The rules are pretty clearly spelled out in Internal Revenue Code §71 (IRC §215 says §71 payments are deductible). Treasury Regulation §1.71-1T provides more detail in easy-to-read form.

Here are some problems that can arise.

Payments before a Written Order or Agreement. Supporting spouses often start making support payments before there is a written instrument requiring the payments, and these premature payments - unless corrected -- are nondeductible.

Termination on Death Requirement. Family support agreements may fail to provide that support terminates on the death of the recipient, and the Tax Court may find the family support nondeductible on that basis alone. Lump-sum buyouts of support need special attention to satisfy the "termination on death" requirement.

Deemed Child Support. If spousal or family support terminates or reduces when a child graduates from high school (or some similar event) or close to the child's 18th or 21st birthday, that support may be recharacterized as nondeductible child support. It gets even more complicated where there are two or more children and two or more reductions in support as the children get older.

Excess Front-Loading. Spousal or family support may decline over the first few years. But if that decline is too steep (excessively "front-loaded"), a portion of the deduction may later be "recaptured" as income. There are exceptions and exclusions, but "temporary support" may not always qualify for an exclusion. This recapture rule can apply unexpectedly and unfairly.

Intentional or Unintentional Nondeductibility. You can always specifically provide that the support is nondeductible, nontaxable. However, boilerplate language regarding tax-free transfers of property can sometimes unintentionally have this effect. Also, payments on property owned by the payer are not deductible as alimony.

Unintended Taxability. Some payments may not be intended to be deductible support, but they may inadvertently satisfy all of the tests for deductible/taxable alimony. Note that some payments to third parties can be treated as "alimony".

american flag graphic Payment to Nonresident Alien. Under the IRC, alimony paid to a foreign citizen may require the payer to withhold income tax. Tax treaties can affect this rule.

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Donald H. Read - Attorney and Certified Tax Law Specialist     Cell Phone: (510) 409-4927     E-Fax: (413) 677-0609