Tax Deduction For Alimony Is Alimony Tax Deductible
October 31, 2009 by John38
If you have already divorced and are required to pay alimony, it is deductible. You do not have to have other itemized deductions greater than the standard deduction as it is treated as a direct deduction from gross income.
If you are going through a divorce, now is an opportunity for some sound tax planning. While alimony can be deducted from your gross income for tax purposes, child support cannot. Of course, the trade off is that the spouse who receives alimony must recognize it as income – but often it is the case that the parties are better off from a tax stand point if alimony is paid instead of child support because the person paying the alimony is in a higher bracket than the person receiving it.
If you would be ordered to pay $500 per month ($6,000 per year) in child support but no alimony, it may serve everyone well if you agreed to pay even $625 per month ($7,500 per year) in alimony with no child support Then, if your federal and state taxes combine to take 40% of your income, you would end up saving $1,500 per year, and your ex-spouse could net more than the $6,000 that would have been paid otherwise. How?
A $7,500 deduction for alimony would reduce your tax liability by $3,000 ($7,500 * 40%), leaving your net costs at $7,500-$3,000=$4,500. If you had child support instead, it would have cost you $6,000 – with no tax deduction. If your ex-spouse is in a lower tax bracket, she may end up receiving more than the $6,000 she would have received in child support.
There is one important risk in this idea though – alimony is not usually reduced because of a drop in income while child support normally is.
There are many new tax questions a divorce presents.
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RT ATO Update: Use of tax file numbers for super purposes – The government has passed legislation that will allow super…