Benjamin Franklin once said that nothing in life is certain but death and taxes. However, in family law taxes is often a point of uncertainly. One particular part of the dissolution process that lends itself to a plethora of tax confusion is spousal support.
Typically, spousal support or “alimony” is tax deductible to the payor and taxable of payee. However, like most things in life this is not a certainty. There are five things to watch out for to ensure that you are getting a preferential tax treatment if you are either the payor or the payee.
1. Spousal support in order to be considered “alimony” has to be paid in cash. The IRS has generously allowed for checks, money orders, and cashiers checks to be considered “cash.” This means exchange of service or goods can’t be considered alimony.
2. The payee and payor cannot be part of the same household. This means that if wife and husband are living together the payment of support cannot be considered alimony.
3. Payments can be paid to third party on the behalf of the payee. This is frequently used in family law. One example of this would be payor paying for payee’s rent or student loans.
4. Attorneys fees used to obtain spousal support could be tax deductible.
5. Watch out for spousal support “front loading.” This largely complicated tax law discourages parties from paying a lot of spousal support for the first two years. That spousal support is actually property transfer disguised spousal support. Parties often do it for tax benefits
Tax consequences in family law can be complicated and confusing. It is very important to speak to a local attorney in Pleasanton, CA or Oakdale, CA to get guidance to ensure you are taking the right steps in your dissolution process.