Support payments pursuant to divorce receive different tax treatment depending upon whether they are characterized as child support or spousal support (also called maintenance).
Payments classified as child support are not taxable to the payee spouse and not tax deductible by the payor spouse.
Generally, a payment is for child support when a divorce decree or other agreement fixes, or specifically designates, all or part of a payment as being for the support of the payor’s child. Thus, any description indicating that an amount is for child support, or for a child-related expense, will render it nondeductible to the payor and nontaxable to the recipient.
In order to receive child support as tax-free income, it must be paid separately from any other settlement amount and should be distinctly labeled as “child support.”
The IRS recognizes two situations in which payments that would otherwise qualify as spousal maintenance (and therefore deductible) are presumed to be child support (and therefore not deductible) because they were reduced at a time that can be clearly associated with the happening of a contingent event. These situations are:
- When there is a reduction within the six-month period before or after the child reaches the age of 18 or 21, or the local age of majority, and
- When the parties have two or more children and support payments are reduced more than once.
To rebut these presumptions, you must show:
- That the reduction was independent of any child-related contingency, or
- That alimony payments are set for a period that is customary in the local jurisdiction, or
- Regarding the first presumption, that the reduction is a complete cessation of alimony during the sixth post-separation year.
Payments classified as spousal maintenance are taxable to the payee spouse and tax deductible by the payor. These payments are not only tax deductible, but “above the line” adjustments to income, meaning that the payor spouse does not have to itemize deductions to get the tax break. In order to qualify for this deduction, it must be paid separately from child support or any other type of payment.
Payments can only qualify as spousal maintenance when the two parties are not members of the same household. This means two completely separate residences. You must also file separate tax returns to qualify for tax benefits for spousal maintenance.
In addition, only payments required through a legal agreement or court order can be considered spousal maintenance. Voluntary payments do not qualify. Spousal maintenance can also not continue after the receiving spouse has died. Spousal maintenance must be paid in some form of cash. Property settlements and other exchanges are not acceptable.
There are a number of requirements that need to be met before you can claim tax deductions for spousal maintenance:
- The payment is by cash, money order or check,
- The recipient and the payer do not file a joint tax return,
- When the payment is made the recipient and the payer do not belong to the same household,
- The agreement to pay ceases at the death of the recipient,
- The separation or divorce instrument does not state that the payment is not spousal maintenance (it does not need to state that it is spousal maintenance, just not claim otherwise), and
- The payment is not treated as child support.
Payments of cash to a third party on behalf of a spouse qualify as spousal maintenance if the payments are pursuant to the terms of a divorce or separation instrument payment of cash by the payor spouse to a third party under the terms of the divorce or separation instrument will qualify as a payment of cash which is received "on behalf of a spouse." For example, cash payments of rent, mortgage, tax, or tuition liabilities of the payee spouse made under the terms of the divorce or separation instrument will qualify.
Any payments to maintain property owned by the payor spouse and used by the payee spouse (including mortgage payments, real estate taxes and insurance premiums) are not payments on behalf of a spouse even if those payments are made pursuant to the terms of the divorce or separation instrument. Premiums paid by the payor spouse for term or whole life insurance on the payor’s life made under the terms of the divorce or separation instrument will qualify as payments on behalf of the payee spouse to the extent that the payee spouse is the owner of the policy.