Following a divorce, there are typically two financial obligations: alimony and child support. It can be confusing at times knowing that whichever the outcome, you will end up losing money if you happen to be the spouse with a stronger financial position i.e. having a higher income from more diverse sources. With this in mind, it would be wise to plan the divorce settlements in such a way that it minimizes your financial expenses.
One such method is to note the difference between alimony and child support so that you can allocate your resources in the most efficient way. If this is done correctly, you can find the whole process much less of a headache and the future obligations much less costly.
What is Alimony?
Alimony or spousal support is the financial obligation of one spouse towards the other in order to ensure he or she is able to keep up the standard of living prior to the divorce. This is in the form of payments paid by the spouse with a higher income level to the other. Alimony is tax deductible, meaning the paying spouse is able to claim this amount as tax deduction, while the receiving spouse has to declare this as taxable income.
Alimony is typically determined based on the following factors:
- The duration of the marriage
- The couple’s respective ages
- Income discrepancy
- Working status of each spouse i.e. if only one of them is working
- Division of assets and liabilities
- Standard of living or lifestyle before the divorce
As not paying alimony is not a crime, some people underestimate its importance and choose not to pay. However, this is a fallacy. You can be liable for contempt charges in litigation if your ex-partner decides to go to Court.
Alimony has an expiration, which typically happens when the recipient is either remarried or cohabiting. You may want to check if this law applies to the State where you live.
What is Child Support?
As its name implies, child support involves providing financial support to the other spouse for the upbringing of young children after a divorce. The receiving spouse is generally the one in custody of the children as he or she will be spending money to raise them. These payments are usually provided until the child reaches a certain age, typically between 18 and 21 years old. As opposed to alimony, child support is not tax deductible, and as a result, the custodial parent is also not required to declare the payments as taxable income.
It is vital to be informed that paying child support is a legal obligation and not doing so is considered a crime.
With regards to making payments for child support, it is in your best interest to employ the service of a CPA. They are more knowledgeable and experienced in tax laws and the implications they have on alimony and child support.
What is the best arrangement of Alimony vs Child Support in Divorce Settlements?
As alimony is tax deductible while child support is not, you will want to allocate as much of your financial resources as possible to alimony as compared to child support.
In a divorce settlement, many items can be counted as tax deductible. The key is to do your research and if you can engage a lawyer who also has experience in tax law, to try to capture as many items as possible since this will go a long way towards saving your money on alimony.
When determining how much alimony is required, the tax bracket of the alimony payer may come into consideration. These are non-straightforward issues that you need to discuss with your professional adviser, legal counsel or accountant.
Understanding IRS Capture
This rule stipulates that any amount of alimony not paid as originally agreed upon during the divorce settlements will be considered as taxable income for the paying spouse. This could happen for two reasons: the alimony payer is not able to make the payments on time, or the recipient no longer needs the payments. In either case, the responsibility falls onto the paying party to pay the corresponding tax. It is therefore important that you take note of this rule in order to avoid additional, unexpected tax bills.
Contingencies Related to a Child
When such situation arises, part of the alimony can be counted as child support, and consequently becomes ineligible for tax deduction as well as taxable for your ex spouse. Where children are concerned in the settlement, the payments will likely not be deductible.
You need to also be aware of alimony recapture, wherein any changes to child support that result in changes to your alimony will then be reassessed and likely to be counted as child support, adding to your list of unexpected tax bills.
In the end, it is recommended to engage a divorce legal counsel to advise you on the proceedings of the alimony agreement. An experienced attorney who has had hands-on experience in this field will be able to help you plan the alimony agreement towards the most favorable outcome and at the same time, minimize the tax obligations for the receiving spouse.