When negotiating the terms of a divorce agreement, there are a great many details that deserve careful consideration. One example lies in how future payments between Ohio spouses are classified. When it comes to matters of child support and alimony, there are pros and cons to how those payments are structured for both parties. Failing to pay attention to the wording can have long term financial ramifications.
When filing one’s taxes, money that is paid as child support is not eligible for a tax deduction. Neither is it taxed as income for the recipient. When it comes to alimony, however, the payments are tax deductible, and the recipient has to claim the payments as income. That can make a big difference in the bottom line when tax time rolls around each year.
In many cases, the party who expects to receive child support and alimony will try to negotiate a higher child support payment in exchange for a lower alimony amount. He or she may offer a reduced duration of payments in return. Receiving the bulk of payments as child support rather than alimony can lower the tax bill for the receiving party.
That said, the party who is making payments often wants to make the most out of any possible tax deduction. He or she is likely to ask that any payments that are not directly tied to the support of a child be classified as alimony. That will reduce his or her tax obligation each year that payments are made.
It should be noted that everyone has a unique set of circumstances when it comes to taxation. There are cases in which classifying payments one way or the other benefits one party and does no harm to the other. For the most part, however, there are tax advantages to be had on both sides, which is why it is important to carefully review the language of an Ohio divorce agreement to make sure that payments are classified correctly.
Source: Forbes, “Ask The Taxgirl: Are Payments Made To An Ex Always Alimony?“, Kelly Phillips Erb, July 23, 2017