Spousal support is used to balance the finances of both spouses after a divorce so that the lower income spouse is not unduly impacted as a result. Such support has tax consequences for both former spouses.
As tax season is now upon us, a recent article has detailed a few potential surprises that may have an impact on a person's taxes. For those who underwent a divorce last year, one of those surprises regards the payment and receipt of alimony. Those who receive alimony payments and other forms of financial support from their ex-spouse are subject to taxes on those payments. The amounts paid are deductible to the spouse making the payments, however. Child support payments received are treated differently than alimony payments and are not taxable to those receiving them.
Alimony is a method of minimizing any negative financial impacts of a divorce to a lower earning on non-income spouse. Alimony is a payment from the higher-earning spouse to the lower income spouse. Whether alimony should be ordered in a divorce is based on a number of factors including the age and finances of each spouse, the length and standard of living the spouses enjoyed during the marriage and the ability of the paying spouse to make such payments.
If alimony is ordered, a court must determine the length of time that payments must be made. Alimony can be rehabilitative, which means that it is paid for as long as necessary for the lower income spouse to acquire education to enable them to obtain employment. Permanent alimony is to be paid until the court deems it is no longer necessary, either by remarriage or death of the receiving spouse.
If alimony is ordered, both spouses must be aware of their rights and responsibilities. As indicated above, a paying spouse is able to deduct the amount of the payments from their taxes, while the receiving spouse will be taxed on the income of such payments.
Source: NASDAQ, "Beware These 5 Terrible Tax Surprises," Jan. 8, 2013