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Alimony versus Child Support

Tax Consequences for Physicians

[By Staff Writers]

Tax considerations are critical when preparing divorce agreements; and an understanding of the applicable sections of the Tax Code is essential for all medical professions in this situation.

In short, alimony is deductible for the payer while child support is not; so it is important for a separation agreement to stipulate that taxpayers report the payments in the same manner. If the person making the payment reports it as alimony, the recipient must include it in income.

The IRS Code Rules

However, when determining whether payments made to a former spouse are alimony or child support, the IRS looks not merely at the agreement, but at how the payments are used. The Code has specific rules for alimony. The payments must be: 

  • Made pursuant to a divorce decree or separation agreement,
  • Made by a payer who is not living in the same household as the recipient, and
  • Payments may not extend beyond the lifetime of either the payer or the recipient.

The last provision can be a trap under some divorce decrees. For example, a doctor makes monthly installments designated as alimony. However, lump-sum payments also designated as alimony are payable under the agreement. In some states, such payments must be made even if the former spouse dies. Alimony payments are not deductible when made to a former spouse after he or she has died.

Front Loaded Payments

In some divorce decrees, alimony payments are front-loaded. Large alimony payments are made in the early years, and then payments dwindle later on. The IRS sometimes challenges whether these arrangements actually are alimony. Property transferred during marriage that is incident to the divorce is not alimony. Such transfers have no tax consequences and should not be claimed as alimony.

Exceptions

While most physician-payers want support payments to be deductible, there are exceptions. In a recent case, the divorce decree ordered one spouse to pay alimony. However, the payer had very little taxable income. Most of his income was from tax-exempt bonds. After negotiations, it was agreed that the payer would not take the alimony deduction, and the recipient spouse would exclude the payment from income.

Child Support

Child support is not deductible for the payer, and the recipient may exclude it from income. However, the parent who has custody of the child or children receives the dependency exemption, but the parties can agree that the payer will receive the exemption(s), provided he or she contributes more than 50% to the costs of the child’s support.

For the non-custodial parent to claim the dependency exemption(s), IRS Form 8322 must be signed by the custodial parent and filed with the IRS. But, you may claim the exemption in alternating years, if you wish.

Assessment

In sum, when negotiating a divorce settlement, there are a number of tax traps to avoid. In some cases the payer may not want alimony payments to be deductible. In other cases payments designated as alimony may not qualify under the Code. The medical business advisor and attorney must determine what is best for his or her client.

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6 Responses

  1. More Alimony Rules

    There are a few more rules not discussed in this article.

    1. Taxpayers cannot file a joint return in any year alimony payments are made.
    2. Alimony payments MUST be made in cash.
    3. Any payments to maintain property owned by the payor spouse and used by the payee spouse (e.g. mortgage, real estate tax, insurance premiums) will NOT qualify as alimony.

    Finally, alimony payments are subject to excess front-loading rules. Payments that decrease too fast (which were previously deducted by the payor) are subject to recapture rules and will be taxed as ordinary income to the payor.

    For more information please visit http://www.irs.gov/taxtopics/tc452.html

    Bill Winterberg

    Like

  2. To Alimony … or not to Alimony

    This website contains detailed descriptions of whether or not payments can be considered alimony:

    http://www.irs.gov/publications/p17/ch18.html.

    It is advantageous to the spouse who is providing the payments to consider those payments to be alimony, to the extent permissible by law. Details of the recapture rule are also included at this webpage. The recapture rule attempts to prevent payment between ex-spouses which are in reality just splitting of marital assets to be considered alimony.

    The “front loaded alimony payments” described above are an example of how divorcing spouses might attempt to move some assets from a tax-neutral exchange to a tax-advantaged exchange.

    Brian J. Knabe MD
    http://www.SavantCapital.com

    Like

  3. In Alabama, child support is figured using Guidelines set out in legislation. These guidelines can be deviated from for good cause shown and if approved by a Judge, but for the most part, they stick to the formula; it’s pretty cut and dry.

    This is done not only in the spirit of fairness and equity to keep everyone’s support balanced, but also because of the sheer volume of Domestic cases coming through the Court system. If a Judge had to figure out every situation differently, nothing would ever get done, so they make a set formula to ensure speedy calculation. This is done in numerous other jurisdictions as well.

    If one is curious about child support in Alabama, there are some up to date Alabama Child Support Calculator (s) out there that will give a pretty close approximation of what your support Order will look like.

    Birmingham Attorney

    Like

  4. UPDATE: Requirements for Deductible Alimony

    For any payment (whether it’s a one-time payment or part of a series of payments) to be treated as deductible alimony for federal income tax purposes, all seven of the following requirements must be met.

    1. The payment must be pursuant to a written divorce or separation agreement.

    2. The payment must be made to or on behalf of your ex. Payments to third parties, such as attorneys and mortgage lenders, are okay if they are made on behalf of your ex pursuant to the divorce or separation agreement or at the written request of your ex.

    3. The obligation to make the payment must cease if your ex dies. Failure to meet this requirement is probably the most common cause of lost alimony deductions.

    4. The payment must be in cash or cash equivalent.

    5. The payment cannot be considered child support.

    6. The divorce or separation agreement cannot say the payment is not alimony.

    7. After you are divorced or legally separated, you and your ex cannot live in the same household or file a joint Form 1040.

    Thurston Howell III

    Like

  5. More on alimony

    Thurston – Well done.

    The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off don’t always satisfy the requirements.

    It also wants to make sure that both the payer and the recipient properly reported alimony on their respective returns. A mismatch in reporting by ex-spouses will almost certainly trigger an audit.

    Alimony doesn’t include child support or noncash property settlements.

    Graham

    Like

  6. On Alimony

    Ex-spouses tell IRS different stories on alimony.

    http://money.msn.com/business-news/article.aspx?feed=AP&date=20140515&id=17624270

    Chad

    Like

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