As discussed in our article Marital Dissolution in California-The Basics and Spousal Support and Child Support Under California Law, the issue of appropriate alimony and child support is often a hotly contested issue for a couple undergoing the dissolution of their marriage.
This article shall provide information regarding the tax treatment of alimony and child support payments under State and Federal tax law.
The Tax Treatment:
Alimony, or spousal support, is defined by the California Franchise Tax Board as, “…money paid from one spouse to another for day-to-day support of the spouse with fewer financial resources.” However, alimony may also include payments made to third parties for the benefit of the former spouse (such as rent payments, medical bills etc.).
Alimony payments are tax deductible for the payer and taxable for the recipient. The receiving party must claim alimony payments given by a former spouse as taxable income on line 11 of federal Form 1040. This number should carry over to the California tax return. If the paying party wishes to benefit from the tax deductions associated with alimony payments, s/he must claim this deduction in line 31 of federal Form 1040. The payer must also include the social security number (SSN) of the recipient for the purpose of verification. The alimony recipient is required by law to give his/her SSN to the alimony payer such that the alimony payer may claim the appropriate deductions. If the recipient refuses to notify the payer of the appropriate SSN, the recipient may be fined.
Nevertheless, five criteria must be met in order for the payer to lawfully claim deductions for alimony paid:
1. The payments must be made in case, check or money order.
2. The relevant divorce or separation instrument does not state that these payments are something other than alimony.
3. The payer and recipient are not members of the same household when any payments are made.
4. The payer has no liability to make any payments after the death of his/her former spouse.
5. The payment is not treated as child support.
Unlike alimony, child support is neither taxable nor tax deductible. Child support is paid for the benefit of the child and is an extension of the parent’s responsibility for his/her child. Therefore, child support payments are considered to be expenses incurred for the benefit of a child regardless of the parents’ marital status.
Too often couples undergoing divorce fail to consider tax implications of their marital settlement agreement or their demands at trial. Getting adequate tax advice on the above issues and such matters as tax treatment of division of life insurance, pension plans, retirement plans, etc. is as vital as determining who retains the family home and other assets. Assuming one spouse is going to be in higher bracket than the other, such tax planning can actually do much to maintain maximum benefit for the family as a whole, a matter often critical at a time of the relatively high cost of creating and maintaining two households. Or, as one client once put it, “Uncle Sam is a party to every divorce, right?"