Alimony

There are basically three ways in which money or property can change hands between divorced or divorcing spouses: child support, alimony, and division of property.

Two of these methods (child support payments and division of property) are generally non-events in terms of your taxes. Child support payments don't affect your taxes at all, unless you fall behind and have your tax refund confiscated to pay child support in arrears. And property transfers from one spouse to another either during a marriage, or transfers within one year after the divorce or pursuant to a divorce or separation agreement, are not taxable events for either party.

However, alimony is a different story. Although alimony (also known as spousal support) is generally out of fashion with most divorce courts, it is still afforded favorable treatment by the IRS.

Alimony is normally deductible by the person who pays it, and is taxable income to the recipient. Because the purpose of alimony is to provide support from a higher-income person to a lower-income ex-spouse, the person paying alimony will very frequently be in a higher tax bracket than the person receiving it. Thus, a tax savings occurs that, in effect, causes Uncle Sam to pay part of the alimony.

Example

John is required by the divorce decree to pay Mary $1,000 a month in alimony. John is in the 25 percent bracket, As a result of paying $12,000 of alimony during 2013, John will reduce his tax liability for the year by $3,000. If Mary is in the 15 percent bracket, the $12,000 in alimony payments will increase her tax liability by $1,800. The $1,200 difference between John's tax savings and Mary's tax increase is, in effect, "paid" by Uncle Sam.

Because the tax treatment for alimony is more favorable than that for child support, the IRS has devised a set of rules that are designed to keep people from treating as alimony those payments that are really a property settlement or child support:

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