Wednesday, May 14, 2014
When money flows from one ex-spouse to another it will generally be one of three things – alimony, child support or property division. Alimony has tax consequences. It reduces the adjusted gross income of the paying ex-spouse and increases the income of the receiving ex-spouse. If this is news to you and you are of the plotting sort, you probably immediately leaped to a conclusion. As long as the paying spouse is in a higher bracket than the receiving spouse, let’s call it alimony and we’ll figure out how to share the savings. Much as we might hate one another, we hate paying taxes more.
If that is how your thinking went, you just ran afoul of Reilly’s Second Law of Tax Planning - Any clever idea that is fairly obvious runs into rules that make it hard. The rules in this case are in the Internal Revenue Code Section 71. They are designed to not allow alimony treatment to payments that are in substance child support or property division. If a payment meets all the requirements of alimony, the agreement can still state that it is not to be treated as alimony for tax purposes.
Read more here.