How are Alimony, Spousal Support, Palimony, or Child Support Payments Taxed?

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How are Alimony, Spousal Support, Palimony, or Child Support Payments Taxed?

A divorce and the subsequent divorce settlement will address many issues, one is divorce tax issues. Affecting not only the divorcing couple, but also the children and the entire household. Aside from custody determinations, some of the most contested issues in a divorce involve support payments. In California, types of support payments that may be included as part of a divorce settlement agreement can include spousal support agreements, child support payments, and palimony. While these concepts are all types of payments that can be made as part of a divorce agreement, they all serve different purposes and receive varying tax treatment.

What Is the Difference Between Alimony, Child Support, and Palimony?

Prior to assessing the differences in how alimony, palimony, and child support payments are taxed it is essential to understand the purpose of each type of payment. To start, alimony or spousal support is a type of payment that is made in support of your former spouse. Alimony in California can be temporary or it can be long-term. Spousal support is calculated by the court and is subject to modification. Palimony is also available in California and it serves a similar function as alimony, however palimony is not alimony because the couple was not married. Rather, palimony (also known as a Marvin action) can permit an unmarried partner to prove some underlying basis, such as a contract, for a claim for support.

Child support differs from both alimony and palimony because this payment is not intended for the former partner. Rather, child support payments are generally made from the non-custodial parent to the custodial parent. The support payments are intended to provide resources for the care and development of a child or children.

Are Spousal Support, Palimony, and Child Support Payments Subject to Differing Tax Treatment?

At divorce the higher earning spouse will often be required to make various types of spousal and family support payments to the lower-earning spouse. While courts are careful to prevent the mischaracterization of payments solely for tax benefits, understanding the tax treatment different payments types will receive is an essential step towards securing a settlement that is equitable and free from surprises.

To start, consider that qualified alimony and court ordered separate maintenance payments are deductible by the payer and are taxable income to the payee under IRC Secs. 71(a) and 215(a). However, child support and/or property distribution payments are nondeductible to the payor spouse and are not taxable income to the recipient spouse. Thus, due to the difference in tax treatment, it is essential that the intent and purpose of all payments is clearly expressed in the divorce settlement.

As for palimony payments, these payments made to former live-in companion do not qualify as alimony because the payments are not between spouses. However, unlike child and spousal support payments where there is no flexibility, taxpayers are generally left free to choose the tax effect of alimony. That is, it can be drafted to either be deductible to the payer and taxable to the recipient or receive the same tax treatment as child support. However, palimony payments are generally considered gifts that may be subject to gift tax unless the payments are specifically designated as for services where they will be taxable income to the recipient.