Deductibility of Alimony

Parties often like – well no one really likes to pay alimony – to use alimony as a vehicle to settle issues in a case because usually, alimony is deductible to the payor and includible in the income of the recipient.  Because of differences in tax brackets, proper structuring of alimony can create additional cash flow for the recipient and additional tax relief for the payor. 

There are times, however, when alimony is paid in a lump sum. Sometimes an alimony obligation is bought out – prepaid if you will (though for the payor, one wonders whether this is a good deal because the recipient can go out and get married the very next day whereas alimony terminates upon remarriage typically (as well as death).  Other times, people make a business decision to front load some of the alimony so that the monthly payments in the future are reduced.

However, lump sum alimony cannot be deducted nor is it includible in income.  Because of this, consideration should be given to what the lump sum should be by perhaps tax effecting the number so that the recipient does not get the full amount, up front, without having to pay taxes on it.

Continue Reading Beware the Lump Sum Alimony Payment