Many married couples in Ohio understand the major effects of a divorce: division of property, separation of a shared life, slightly lower expenses on a halved income and the sharing of time with children. All of these things can lead to immense amounts of stress if not properly addressed. But here’s one thing that some divorcing couples do not know: Spousal support is considered tax-exempt for the payer and as income for the payee.
This may result in some tax changes that both spouses did not expect as long as alimony is awarded. The other forms of payment made during a divorce agreement do not have any unexpected tax implications like alimony does. Both child support and property settlements are unaffected. According to reports, some payers are using alimony’s stipulations as a tax advantage.
Instead of paying child support or property settlements, which would be taxed for the payer, some spouses are opting to allocate those payments into alimony so that taxes are not paid by the payer. This has come in handy for some individuals who are in a higher tax bracket than their former spouses, but it is illegal. The Internal Revenue Service has rules that disallow the characterizing of child support and property settlements as alimony.
The rules are somewhat complicated, according to one expert. Still, he believes that divorce attorneys should be able to comprehend those laws. That has not stopped some divorce settlements from abusing this loophole, including one separation agreement made in 2003. That agreement allotted $2,450 per month for alimony to be paid by the ex-husband to his ex-wife. The payments would be made for six years but would decrease each time one of the children either turned 18 or left for college during the year before they turned 19.
According to experts, the settlement was a blatant replacement for child support. Many payers have managed to get payees to agree to such settlements by sharing the tax savings.
Source: Forbes, “Are Divorce Attorneys Trying to Whipsaw IRS?” Peter J. Reilly, Sept. 11, 2012