Since the first go round of the proposed massive revisions to the tax code were announced several weeks ago, matrimonial lawyers, litigants, accountants, etc. have been in a veritable tizzy over the prospect that one of the modifications was to eliminate the deductibility of alimony payments by the payer and the includability of the payments
What happens when a support obligor shorts his alimony and child support payments and then tax time comes around? Of course, since alimony is deductible to the payor, he/she is likely to want to claim that most or all of the payments were alimony in order to get the deduction. Inevitably, if the recipient doesn’t…
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.