The growing divorce rate in America has led to the creation of various types of spousal support where one ex-spouse is required to pay to the other. In most cases, the higher-earning spouse is required to pay the lower earner a certain amount, although there are exceptions to this. However, the tax rules are not the same for all types of support - some types are reportable as income while others are not. That said, the rules for each kind of support are relatively simple to learn. This article explores the factors that determine how spousal support is classified and subsequently taxed. (For related reading, check out Get Through Divorce With Your Finances Intact.)

Tutorial: Financial Concepts

Types of Spousal Support
There are two main types of support that are awarded to ex-spouses today. One is known as alimony and the other is called child support. The former type of support has become relatively less common over time and has largely been replaced with child support for divorcing couples with children. Both types of support are awarded by either a divorce decree, written agreement of separation or decree of support. Failure to pay either one of them can result in further legal action, including garnishment of tax refunds of the payor or additional litigation by the rightful recipient. Different regions typically have different laws that outline the consequences of nonpayment.

This type of spousal support is often awarded in divorces where children are not involved. In most cases, alimony payments are tax deductible by the payor and reportable as taxable income by the recipient. However, the following requirements must be met to receive this tax treatment:

  • Alimony must be clearly specified in the divorce, annulment or separation agreement. No payments that are made under any circumstances outside this agreement can be labeled as such.
  • Alimony must be specified as a mandatory payment in the agreement. Any voluntary payments that are made to one ex-spouse by the other cannot be considered alimony and are not deductible or taxable for the payor or receiver respectively.
  • Alimony payments must be made in cash, or through such liquid payments as checks and money orders. All transfers of noncash property fall outside this category.
  • Deductions of aggregate alimony payments of more than $15,000 that are made in the first or second year may be recaptured in the second or third year if a lesser payment is made that year. (The rules pertaining to this provision are somewhat complicated and those to whom they apply should seek counsel from their tax or financial advisor.)
  • Any provision that payments made to an ex-spouse for the purpose of supporting children or dependents automatically disqualifies the payments as alimony.
  • Payments made by one ex-spouse to another cannot be considered alimony if both spouses still live in the same household when the payments are made.
  • Alimony payments cannot last beyond the death of the paying spouse. If payments are continued into the recipients active accounts, none of the payments can be deducted for tax purposes.
  • Alimony can also be nondeductible and therefore nontaxable if both spouses agree to specify this in the divorce decree.

Alimony paid is reportable as an above-the-line deduction, which means that the payor is not required to itemize in order to deduct these payments. Taxpayers who pay alimony must include the Social Security number(s) of any and all ex-spouses to whom payments are made in order to deduct the payments. Failure to do so will result in disallowance of the deduction. Those receiving payments must provide their Social Security numbers to the paying spouse or face a penalty from the IRS.

Child Support
This form of spousal support is specifically designated to be for the benefit of any children that are supported by the ex-spouse receiving the payments. Child support is never deductible by the payor and is not reportable or taxable as income by the recipient. Any type of monetary payment made by one ex-spouse to another that either ceases, diminishes or otherwise changes upon the occurrence of certain events pertaining to the children, such as their reaching the age of majority or moving out of the house, results in a modification to child support requirements. As mentioned previously, both the IRS and state governments have the authority to garnish any tax refunds due to delinquent payors of child support.

Property Settlements and QDROs
Any initial division of property that is made because of a divorce is usually considered a tax-free exchange of property by the IRS. The recipient takes on the basis of any property received and pays no income tax upon its transfer. Any type of IRA or retirement plan that is transferred from one spouse to another under a qualified domestic relations order (QDRO) is also considered a tax-free exchange of property. (Learn how different rules of asset handling apply to various retirement plans. Read Getting A Divorce? Understand the Rules Of Dividing Plan Assets.)

Which Type of Payment is Better?
As you can see, alimony payments obviously favor the payor, while child support payments are more beneficial to the recipient from a tax perspective. However, there are several factors that divorcing couples should consider when determining the nature and amount of payments that are to be made. Of course, the issue of who will get to claim the dependency exemptions and tax credits for any children involved as dependents is another key issue. If one spouse's income is too high to be able to claim any potential tax benefits benefits, then it may be wise to allow the other spouse to do so, perhaps in return for receiving taxable alimony payments instead of child support. If the receiving spouse's income is fairly low, then receiving alimony payments may have little or no impact upon his or her income, and therefore may be elected in return for other benefits to be provided by the payor, such as a more favorable custody agreement. The nature of the payment requirements also depend on the overall circumstances of the divorce.

Bottom Line
Of course, the good will of both ex-spouses is necessary to logically determine what arrangement is best for both parties; therefore, divorcing couples should recognize that it is in both parties' best interests to know these rules and plan accordingly. Failure to understand the tax implications of divorce can often lead to missed credits and deductions that ultimately reduce the income of both parties involved. Couples who are contemplating divorce or who have begun the divorce process may be wise to consult a professional with specialized training in the financial ramifications of divorce, such as a certified divorce specialist. (Use your skills to help people preserve their financial integrity in a failed marriage. Find out more in Become A Certified Financial Divorce Analyst.)

Related Articles
  1. Home & Auto

    4 Areas to Consider Roofing Material Types

    Roofing your home is very important, that’s why you should choose a roof specifically designed to handle your area’s climate.
  2. Economics

    The Top 9 Things to Know About Hillary Clinton's Economic View

    Find out where former secretary of state and Democratic presidential candidate Hillary Clinton stands on the economy, jobs, trade and education.
  3. Retirement

    How do you calculate penalties on a 401(k) early withdrawal?

    Find out how to calculate the penalties on early withdrawals from your 401(k), including the impact of the additional 10% tax penalty, vesting and income tax.
  4. Savings

    A Look at the Cost and Tax Treatment of College

    Is there more we can do to improve the affordability of post-secondary education? We take a look at how students and colleges are taxed today.
  5. Taxes

    What's Wrong with the American Tax System

    American's are highly taxed and we still run a deficit. We explain why.
  6. Retirement

    Top Tips for Minimizing Taxes on Social Security

    Social Security benefits are taxable under certain circumstances. Here are some ways retirees can lessen the tax burden.
  7. Taxes

    What's IRS Form 2848 Used For?

    It's a power of attorney tax form and here's what it can, and cannot, do.
  8. Term

    What is Wealth Management?

    Wealth management combines financial and investment advice, accounting and tax services, and legal and estate planning.
  9. Mutual Funds & ETFs

    Understanding Taxation On Leveraged ETFs

    Read about the potential tax implications for investors of leveraged exchange-traded funds, or ETFs, and learn why leveraged ETF taxation can be so complicated.
  10. Taxes

    Top Tips for Minimizing Taxes on Severance Pay

    A look at the top ways to lessen the tax burden on severance pay.
  1. Section 1231 Property

    A tax term relating to depreciable business property that has ...
  2. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  3. Duty Free

    Goods that international travelers can purchase without paying ...
  4. Wealth Management

    A high-level professional service that combines financial/investment ...
  5. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  6. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  3. Are credit card rewards taxable?

    Credit card rewards are taxable in the United States some of the time. The Internal Revenue Service (IRS) classifies credit ... Read Full Answer >>
  4. What is the Social Security tax rate?

    The Social Security tax rate is 12.4% as of 2015. Of that amount, the employee is responsible for half, or 6.2%, and the ... Read Full Answer >>
  5. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  6. How is Social Security tax calculated?

    The Old-Age, Survivors and Disability Insurance program, or OASDI, tax is calculated by taking a set percentage of your income ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!