Frequently Asked Questions about Divorce Mediation

• How do taxes work with alimony and child support?

   

  Child support has no tax implications for either spouse; it is considered neither income nor deductible.  If you think about it, your child's expenses would be paid whether you remain married or get divorced.

   

  For alimony, the couples have a choice.  The first option is that the payer can take it as a deduction on their taxes and the payee counts it as income.  Or the couple can agree to make it tax neutral -- neither a deduction nor income resulting in no tax effects.  This can be discussed in mediation and incorporated into the memorandum of understanding and the property settlement agreement.

   

  To be eligible for a deduction, the following conditions must be met:

   

  1. You and your spouse or former spouse do not file a joint return with each other,
  2. You pay in cash (including checks or money orders),
  3. The divorce or separation instrument does not say that the payment is not alimony,
  4. If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment,
  5. You have no liability to make any payment (in cash or property) after the death of your spouse or former spouse; and
  6. Your payment is not treated as child support.

   

  There is an advantage in choosing the deduction.  Let's assume that the alimony payer is in the 33% marginal tax bracket and agrees to pay $2,000 per month to the payee who earns far less and is in the 15% tax bracket.  The deduction on the payer's support payment would amount to $660 per month or $7,920 per year.  The tax incurred by the payee on the same $2,000 payment would be $300 per month or $3,600 per year.  So, due to tax effects, an additional $4,320 per year has been "created" and can be negotiated between the parties.

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