When discussing your Pasadena divorce settlement, your attorney is likely to mention that alimony and child support payments are treated differently under the law. Child support is not taxable income for the recipient, nor is it a tax deduction for the person making the payments. Alimony, however, is both taxable income for the recipient and a tax deduction for the person making the payments.
Failing to properly classify payments made as a result of your divorce settlement can land you in hot water with the IRS. An interesting example of this occurred in the decision from the United States Tax Court, Johnson v. Commissioner of Internal Revenue. This case involved a former husband who was found to have underpaid his taxes due to misclassification of spousal support. The court ruled payments to his ex-wife were not considered alimony because the amount of such payment was subject to a "child-related contingency." The couple’s divorce agreement listed three circumstances for ending alimony, one of which was the graduation from high school of the couple’s youngest child.
Mr. Johnson was paying over $6,000 per month in alimony, but only $500 per month in child support for the care of three minor children at the time of his 2006 divorce. The spousal support payment was later dropped to $4,000 per month and the child support dropped to $200 per month. Over time, the difference in tax treatment of the payments resulted in a substantial deduction for him on his taxes. The court found that because of the divorce agreement, the alimony payment was, in effect, child support money, and should therefore be taxed as such.
To avoid similar legal troubles in your own divorce, it is recommended that spousal support payments not be tied to any child-related milestones such as entering or graduating from high school.
How Can We Help?
Please call our office at (626) 683-8113 or email us at info@PasadenaLawOffice.com if you are in need of assistance with a spousal support related issue. Our skilled Pasadena family law attorneys can discuss your options and help you develop a strategy that best addresses your unique situation.