Divorce Mediation Spousal Support Alimony and Taxes

As we learned in our last post, child support for the most part is a non-taxable event but what about spousal support or as it was formerly known here in New Jersey: alimony? What are the tax implications for payments from one spouse to an ex-spouse for their own support and not of their children? The short answer is spousal support / alimony is a taxable event unless otherwise stated in your Memorandum of Understanding.  Forgive the shameless plug but this is an instance in which you really want your divorce mediator to have both a legal and financial background like I do as this topic can get pretty tricky and is definitely more complicated that can be explained here.

First some background.  Regardless of your belief in spousal support / alimony, the idea behind it is that marriage is an emotional as well as a financial partnership so spousal support / alimony is meant to compensate one spouse financially for the dissolution of this economic part of the partnership recognizing that each party made contributions ot the  marriage that allowed both parties to enjoy a certain measure of financial success.  Notice I keep saying spouse as spousal support / alimony is not simply a payment an ex-husband makes to an ex-wife (although it quite often is) but rather a payment from one spouse to another spouse and with more women achieving positions of prominence in the corporate world and being compensated financially for it, there are instances in which an ex-wife is paying spousal support / alimony to an ex-husband.

In the most simple of examples, spousal support / alimony is a taxable event.  The party who pays it gets to deduct it from their taxes and the party who receives it must claim it as income so this does present some unique tax challenges for both parties.  For example, let’s say the receiving party needs $500 in support to make ends meet and receives $500 a month in spousal support / alimony.  While that may be fine on a month to month basis, come tax time, that $500 will be effectively reduced to $375 assuming a 25% tax rate after taxes so in reality, they are short $125 a month or $1500 a year while the paying party received a tax benefit for the deduction they received by claiming it on their taxes.  Your New Jersey divorce mediator can help each of you with options such as “grossing up” the amount or making it a non-taxable event.

Another issue to watch out for when it comes to spousal support / alimony is calculating it especially when done in conjunction with child support.  Because spousal support / alimony is a taxable event and child support is not, parties sometimes manipulate the amount of each payment so that while on a month to month basis you are receiving the same amount of dollars, the amount being received in child support is higher and spousal support / alimony is lower.  Maybe it looks like a tax savings for each of you since child support is a non-taxable event but this can have disastrous consequences depending on how close the children are to emancipation since child support ends for the most part at age 18.  There you would be no longer receiving any money even though the dollars were intended as spousal support / alimony and in reality they came over as child support.  Don’t think this happens?   I’ve seen it with my own eyes and is one of the dirty tricks people try and pull during divorce mediation session and the subject of a previous article that you can read here.

I hope you’ve found this series of articles helpful and encourage you to contact us should you have any questions about divorce mediation or if you’d like to schedule a free, no obligation consultation to learn more about our divorce mediation services.  Please note that this article is not meant to be construed as legal or tax advice and that since everyone’s situation is unique, it’s always best to consult with your accountant, mediation service, or NJ mediator regarding your specific situation.

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Equitable Mediation Services is a New Jersey divorce mediation practice serving Somerset, Mercer, Middlesex, Essex, Morris, Union and Hunterdon counties including the towns of Edison, Parsippany, East Brunswick, West Orange, Bridgewater, South Brunswick, Hillsborough, Livingston, Randolph, Maplewood, West Windsor, Summit, Plainsboro, Millburn, Morristown, Montgomery, Madison, Readington, Branchburg, Warren, Princeton, Metuchen, Lawrenceville, Pennington, Short Hills, Bernards, Bedminster and surrounding areas.