Divorce is a trying time. You work with lawyers on the legal issues but you should also get professional tax advice. And with Texas being a community property state, the tax consequences are more important. Before you sign anything, make sure you understand the tax consequences as well as the legal ones. Tax consequences follow every decision made in a divorce. Even when the choices are limited, knowledge of the tax problems created by the divorce may help achieve a better settlement.
Alimony vs Child Support
Periodic alimony is included in the taxable income of the recipient and it is tax deductible to the payor. Child support is not included in the taxable income of the recipient and it is not tax deductible to the payor. So all other things being equal, payors want as much of support as possible to be alimony and recipients want as much of support as possible to be child support.
But all other things usually are not equal, in particular the incomes of the payor and the recipient. When the payor's income is considerably higher than the recipient, there may be an advantage to both spouses to paying alimony rather than child support, because the tax advantages of alimony allow the payor to increase the after-tax support level to the recipient.
It's not unusual in divorce for the higher-income spouse to agree to pay additional incidental expenses of the other spouse for years, sometimes indefinitely. These are things like medical insurance, life insurance on the payor's life, home mortgage payments, and car payments. In these cases, it is usually smart to take the time to ensure that the payments for each expense qualify as alimony.
The same principle applies to the payments that the payor often makes to the recipient in a one time property settlement in connection with the divorce itself. It is often better for both spouses, if these can be paid in the form of periodic alimony. Again, the payor may need to increase the payments to compensate the recipient for the cost of the taxes, and both spouses can end up with more money to spend. Because it is better for many couples to pay and receive support in the form of taxable alimony, the government has set up restrictions.
1. Excess alimony - make sure alimony is not "front-loaded" - too concentrated in the period immediately after the divorce.
2. Alimony fixed as child support - make sure the alimony isn't reduced or eliminated on a date corresponding to a date when one or more of the children reaches one of several specified ages.
Top of Page Alimony vs Loan Payments
Structuring alimony payments is important when payments of joint liability loans are involved.
Your alimony deduction is cut by half of any loan payments
made even if the divorce decree requires you
to make the mortgage payments. That's because one-half of the payment
is discharging your own loan obligation. (Harris, Tax Court Summary Op. 2007-169).
The information you obtain at this site is not, nor is it intended to be, tax advice. You should consult a licensed tax professional for individual advice regarding your own situation.
