Tax Education Series #8: Difference between Child Support and Alimony, and Why it Matters!
Hello everyone,
This is a question that I get often, what is the difference between child support and alimony? Does it matter how one spouse pays another after a divorce? The answer is ABSOLUTELY!
First, definitions. Child support is money provided to the spouse who will be primarily responsible for incurring expenses to raise a child. That means that the spouse receiving child support will not count the money as taxable income. Vice versa, the spouse PROVIDING the payment will have to do so on an after-tax basis. Short answer: tax benefit goes to the spouse receiving payment.
Alimony is any payment from one spouse to another that is not child support. Alimony can be many things, including spousal support. In this case, however, the tax treatment is the opposite. The spouse PROVIDING the payment can deduct the alimony payment from taxable income, hence receiving a tax benefit. Vice versa, the spouse receiving the alimony must count that towards his/her taxable income, and hence pay taxes on the amount. Tax benefit goes to the spouse providing payment.
So a tax tip for those who might be going into this type of situation:
If you are the spouse providing payment to the other, try to negotiate so that the payment will be recognized as alimony, not child support. Depending on the tax bracket of each spouse, it might be advantageous for the giving spouse to offer a slightly higher monthly amount, and still come out ahead come tax time.
Let's look at an example:
The giving spouse's tax bracket is 40%. Initially discussed monthly child support is 500 dollars. The giving spouse offers to pay $100 more per month for a total of 600 dollars but on one condition: both sides must agree that the entire payment will be recognized as alimony. Based on the 40% tax bracket, the giver saves 240 dollars/month in taxes (600 x 40% tax rate), so the net payment is really only 360 dollars/month (600-240 tax savings). If no negotiation took place, and the monthly support of 500 dollars was agreed as a child support payment, the giver is paying out 500 dollars, with no tax savings (because child support is not tax deductible on the giver's tax return). That means the giving spouse just saved 140 dollars (600-360), even though the monthly payment WENT UP by 100.
The receiving spouse may not care whether the payment is recognized as child support or alimony, because he/she may be in a zero percent tax bracket (see my Tax Series #5 for these types of situations). So the receiver will be only too happy to accept the offer of $600 payment.
Result: it's a Win-Win for both sides! and the only loser is the Internal Revenue Service. (and sorry, IRS. We the taxpayers have every right to look for tax savings, since taxation is a forced extraction of financial resources from taxpayers.)
If you are not sure about something, as always, I am here to help. Feel free to reply with your questions and I will guide you in the right direction. Thanks for reading!
If you found this article helpful, please check out my previous posts below:
Tax Education Series #7: Top Tax Tips to Save Money
Tax Education Series #6: Tax Benefits for Students
Tax Education Series #5: Do you need to file an income tax return every year?
Tax Education Series #4: Difference between tax deductions and tax credits
Tax Education Series #3: Earned Income Tax Credit
About the Author : I am a cryptocurrency enthusiast and a U.S. Certified Public Accountant with over 15 years of experience in accounting, taxation, and finance.
If you like this education series, please follow me @qwesttexas. I am here to help the Steemit community with tax questions and break down confusing tax jargon into plain English so that we can all benefit from it. Let's go Steem!