Tax Treatment of Support Payments

Support payments pursuant to divorce receive different tax treatment depending upon whether they are characterized as child support or spousal support (also called maintenance).

Child Support

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.

Spousal Maintenance

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.

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Spousal Maintenance

Previously known as as alimony, maintenance is an award of money by the court for the support of a spouse. Maintenance can be for a fixed period of time or for an indefinite period of time, which can be for as long as the recipient lives or until he or she remarries. In fact, the court can terminate maintenance upon proof that the recipient is habitually cohabiting with a person of the opposite sex and is holding himself or herself out as the spouse of the person with whom he or she is living.

In determining the duration of a maintenance award, the court will take several factors into consideration, the primary one being how long it will take for the supported spouse to become self-supporting. Other factors the court may consider are whether schooling is necessary, the health of the recipient, the recipient’s age, and the payor’s financial ability to pay the support. While there is no set rule, the decision is discretionary with the court, and each case must therefore be decided on its facts.

Generally in long-term marriages (more than ten years) where the recipient is in his or her late forties or older, with no expectation of becoming self-supporting, and where the party paying support has the financial ability to do so, the court will order non-durational or lifetime maintenance.

In deciding how much maintenance to award, a court will look at the reasonable needs of the recipient (based upon the prior standard of living) and the income and assets of the recipient, balanced against the income and assets of the party paying the support. The New York Domestic Relations Law lists many factors for a court to consider in making the award. The factors include:

• the income and property of the respective parties including marital property;
• the duration of the marriage and the age and health of both parties;
• the present and future earning capacity of both parties;
• the ability of the party seeking maintenance to become self-supporting and, if applicable, the period of time and training necessary;
• reduced or lost lifetime earning capacity of the party seeking maintenance as a result of having foregone or delayed education, training, employment, or career opportunities during the marriage;
• the presence of children of the marriage in the respective homes of the parties;
• the tax consequences to each party;
• contributions and services of the party seeking maintenance as a spouse, parent, wage earner and homemaker, and to the career or career potential of the other party;
• the wasteful dissipation of marital property by either spouse; and
• any transfer or encumbrance made in contemplation of a matrimonial action without fair consideration.

Maintenance may be awarded to either spouse without regard to gender and is intended to be rehabilitative, unlike alimony which had been awarded in order to help maintain the payee’s prior standard of living. While New York no longer uses the term “alimony,” the Internal Revenue Service still does, and any reference to alimony by the I.R.S. should be read as maintenance.

Furthermore, unlike child support, there are no set guidelines and the practical reality is there can be huge differences in awards based upon similiar facts. Likewise, unlike child support, maintenance is normally taxable to the recipient as income and a deduction to the person who pays it.

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Fault and Finances

For reasons that remain shrouded in the impenetrable fog of Albany politics, New York, alone among all of the states, still does not recognize “no-fault divorce.” Not surprisingly, the requirement that a spouse demonstrate abandonment, adultery, or cruel and inhuman treatment proves to be no impediment, particularly when (as is typically the case) both sides want to be divorced in the first place. What may be surprising, though, is the fact that fault is almost completely irrelevant to the financial issues involved in a divorce, such as spousal maintenance, child support, and equitable distribution of marital property.

Exhibit A is the recent decision of the First Department in Howard S. v. Lillian S., involving a wife who, after several years of marriage and two children, had an extramarital affair and became pregnant. The husband, who was unaware of the affair, had no reason to suspect that his youngest child was not, in fact, his. Later, when he became suspicious, he arranged for a DNA test that established he was not the father. He promptly filed for divorce and argued that, because his wife's conduct constituted “egregious fault” under New York’s Domestic Relations Law, it should be considered as a factor against her in determining equitable distribution.

The Appellate Division, however, disagreed. They concluded that, while the wife’s alleged misconduct cannot be condoned and clearly violates the marital relationship, it did not rise to the level of “egregious fault,” since she neither endangered the lives or physical well-being of family members, nor deliberately embarked on a course designed to inflict extreme emotional or physical abuse upon them. Twisting the knife, the Court also held that the husband was not entitled to recover the money that he had spent supporting the child because he could not establish that he would have immediately filed for divorce had he learned the truth earlier.

The lesson here is simple. Unless he or she has hired a hit man in a botched attempt to rub you out, it just doesn’t matter how bad or nasty or [fill in the blank] your spouse is when it comes to the question of who gets what. So, even though New York doesn’t have no-fault divorce, at least it has no-fault equitable distribution. You might call that progress.

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Modification of Child Support and Spousal Maintenance

The current recession is not affecting everyone in the same way. Some already are (or soon will be) financially devastated. Others will ride it out relatively unscathed. This disparity can cause real problems in situations involving child support and alimony agreements or awards that were made during past, more stable, financial times. An ex-husband or -wife who has lost their job may no longer be able to meet now-crushing financial obligations. On the other hand, a single parent who receives much-needed child support may now find that it’s not nearly enough make ends meet.

What can be done? Ordinarily, someone in this kind of situation can go back to court and seek a modification, upwards or downwards as the case may be, based upon an unanticipated, unreasonable, and substantial change in circumstances. It isn’t necessary for someone to prove dire need in order to be able to show such a change. On the other hand, a wide disparity in income alone usually will not be enough to convince a court to change an arrangement that had previously been decided.

The loss or reduction of a job, however, is usually the kind of change in circumstances that results in a modification of child support or alimony – so long as the unemployed party can prove that they are being diligent in seeking new employment. Furthermore, if the job wasn’t really lost, but was thrown away, such as quitting for no good reason or being fired for a very good reason, a court likely will refuse to modify the payments because a party who causes his own inability to pay will not be rewarded for their efforts. And, of course, where child support is at stake, the paramount concern of the courts is and always will be what’s in the best interest of the child. The same should be said for the parents.

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