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Alimony and child support are not created equal

On Behalf of | Oct 13, 2017 | Spousal Support

Michigan estranged couples may need guidance when it comes to evaluating the tax consequences of divorce settlement offers. In cases where there is flexibility around the amounts of alimony and child support, the decision as to these amounts may have a significant impact on the taxes of the parties. From a tax perspective, child support and alimony are very different things.

Specifically, alimony is deductible on the tax return of the payer and must be included as income by the recipient. Child support, on the other hand, is neither taxable to the recipient nor deductible by the payer. If payments are received but are less than the total amount of alimony and child support combined, only the amount paid over the required child support may be considered alimony, regardless of how the payments are categorized at the time they are made.

In a case where there are multiple possibilities for support payments, the most beneficial option may not be obvious. An offer of alimony in the amount of $2,500 and child support of $2,500 will yield the recipient $4,125 after taxes, assuming a total tax rate of 35 percent on income. An offer of alimony at $4,500 and child support at $1,000 is worth $3,925 after taxes, and an offer of alimony at $5,500 and child support at $500 nets the recipient $4,075 after taxes. The latter two offers are worth less, even though their pre-tax amounts are higher.

In analyzing offers, there are other factors to consider beyond tax implications. The length of the marriage usually determines the duration of alimony payments, for example, and the age of the children determines how long child support payments will last. Oakland County spousal support attorneys may be able to help by examining the different alimony and child support options available to the client.