Getting Divorced? Know the Difference Between Alimony and Child Support

In my divorce planning practice, I have been asked numerous times the question, “Which is better, alimony or child support?” Better is not the correct word to use in this situation and I am quick to point out that “more advantageous” is the proper phrase.

In the eyes of the almighty Internal Revenue Service, alimony and child support are as different as night and day. Child support is “tax neutral,” which simply means that it has no taxable impact on the person either receiving it or paying it. There is not even a line on the tax form to where you can report the transaction.

Alimony, on the other hand, has tax implications for both the payer and the recipient. The person who pays alimony must report it on line 31A of the IRS form 1040 and must include the social security number of the recipient. This will reduce the AGI (Adjusted Gross Income), which is the basis for many income tax calculations. These include the thresholds for deducting medical expenses, miscellaneous deductions and casualty losses. In addition, we use the AGI to determine how much social security benefits are taxable. The AGI is also the determining factor in whether or not you may be eligible for many of the credits, such as the Making Work Pay, Child Tax, Eared Income, and all of the Education credits.

The recipient of the alimony will report it on line 11 of the IRS form 1040 and it will increase their AGI, with all of the negative implications. If you are accept more in alimony and less in child support, you could be hurting yourself in the long run,

There is also a major legal difference between child support and alimony and I think that it is a mistake to ignore it. The person who fails to pay court ordered child support payments is breaking the law and committing a criminal act. If a person is delinquent in making payments they can be arrested, have driving privileges curtailed and wages and tax refunds attached. The same remedies do not apply to being late with alimony payments.

In most instances, after a thorough review of the client’s financial picture, the recommendation most often is to seek the largest amount of child support unless consideration is given to the loss of the tax credits. It is not simply a case of looking at each person’s tax bracket, but also making the effort to determine the impact of the decision now and in the near future.