The Tax Considerations of Alimony and Property Transfers

Know the Tax Laws

• Alimony is taxable income to the recipient and deductible for the spouse that pays.
• Child support is neither deductible by the payer nor included in the taxable income of the recipient.
• Alimony is becoming increasingly rare. If granted, alimony should be listed separately from child support in a property settlement agreement and paid with a separate check. The IRS closely checks tax returns for attempts to “disguise” alimony as child support.
• Both ex-spouses may need to adjust their tax withholding with their employer to reflect the impact of alimony payments and other financial changes related to divorce. A general rule for claiming children is that the personal exemption goes to the custodial parent. It is possible to shift the exemption to the noncustodial parent, however, by having the custodial parent sign a waiver (IRS Form 8332) for the noncustodial parent to attach to his or her tax return.

Watch Property Transfers

• Be aware of the tax implications of property transfers made at divorce. For example, if one spouse receives $50,000 worth of stock that was originally purchased for $5,000, he or she will have to pay capital gains tax on the $45,000 increase in value when the stock is eventually sold.
• The bottom line: appreciated assets such as stocks, real estate, and collectibles often are worth much less than their face value because they contain built-in capital gains and may require sales expenses such as broker commissions and appraisals.