Spousal and family support are generally deductible as “alimony” by the payor and taxable to the recipient and child support is generally nondeductible and nontaxable.
However, here are some problems that can arise:
Spousal Support Payments Made Before a Written Order or Agreement
Supporting spouses often start making support payments before there is a written instrument requiring the payments and these premature payments – unless corrected – are nondeductible.
You can always specifically provide that spousal support is nondeductible and nontaxable. However, absent an actual prior written agreement or court order, any payments made for support of a spouse do not constitute deductible alimony, even if your former spouse willingly signs an agreement after the fact.
Termination of Spousal Support on Death
Agreements between Husband and Wife may fail to provide that support terminates on the death of the recipient, and the Tax Court could find any provision for family support is nondeductible on that basis alone. Further, lump-sum buyouts of support need special attention to satisfy the “termination on death” requirement.
Spousal Support Might be Deemed Child Support by the IRS
If a Family Support Order calls for payment of $100 per month in spousal support and $100 per month in child support, yet the paying spouse pays only $150 per month, only $50 per month will be treated as deductible alimony for tax purposes. Further, if spousal or family support terminates or reduces when a child graduates from high school (or some similar event) or close to the child’s 18th or 21st birthday, that support may be recharacterized as nondeductible child support. It gets even more complicated where there are two or more children and two or more reductions in support as the children get older.
Excessive Front-Loading
Spousal or family support may decline over the first few years. But if that decline is too steep (excessively “front-loaded”), a portion of the deduction may later be “recaptured” as income. There are exceptions and exclusions, but “temporary support” may not always qualify for an exclusion. This recapture rule can apply unexpectedly and unfairly, so make sure to consult with your attorney and tax adviser first before entering into such an agreement.
For more information about support and other family law matters, contact The Reape-Rickett Law Firm at 661 288-1000, located at 25152 Springfield Court, Suite 100, in Valencia, California.