Income Tax Considerations of Alimony and Child Support

You recently advised that you and your wife are planning to divorce, and requested information about the tax consequences of paying alimony and child support.

If you pay alimony to your wife, you may deduct the payments from your gross income and your wife must include the payments in her gross income. Alimony is a payment to a spouse or former spouse under a divorce or separation instrument. A payment under a divorce or separation instrument is alimony if the spouses do not file a joint return and the following requirements are met:

• 1. The payment is in cash.

• 2. The divorce or separation agreement does not designate the payment as being something other than alimony.

• 3. The spouses are not members of the same household when the payment is made.

• 4. There is no liability to make the payment after the death of the recipient spouse.

• 5. The payment is not treated as child support.

A payment that is fixed as child support, or treated as fixed, under your divorce or separation instrument is not alimony. A payment is considered fixed as child support if your instrument specifically designates an amount or part of the payment as support for your child. The designated amount may vary from time to time. Child support payments are neither deductible by you, nor taxable to your wife. A payment is treated as fixed as child support if the payment is reduced either: (1) on the happening of a contingency relating to your child; or (2) at a time that can be clearly associated with the contingency. Common contingencies include: reaching a specified age or income level; dying; marrying; leaving school; leaving the household; or becoming employed.

There is a recapture rule that changes the tax treatment of alimony payments if the payments are reduced or terminated during the first three years you are making payments. For the recapture rule to apply, the annual amount of alimony you pay your wife must decrease by more than $15,000. If the recapture rule applies, you must include previously deducted alimony in income and your wife, who previously included the amounts in income, is allowed a deduction for the recaptured amounts.

If you have any questions regarding the rules outlined in this letter, please feel free to call.

Election to Designate Alimony as Not Alimony

Editor's Note: Under Section 71(b)(1)(B), a taxpayer and his/her divorced or legally separated spouse may designate that otherwise qualifying payments are not alimony by including a provision in their divorce or separation instrument that the payments are not deductible by the taxpayer and are excludible from the spouse's income. Any writing signed by both spouses that makes this designation and refers to a previous written separation agreement is treated as a written separation agreement.

To exclude the payments from income, the payee spouse must attach a copy of the instrument designating the payments as not alimony to his/her first filed return for each year the designation applies. If the parties are subject to temporary support orders, the designation must be made in the original or a subsequent temporary support order.

Divorced or legally separated spouses may be inclined to elect this treatment if an overall reduction in tax liability would result. For example, if the payor spouse's income is from tax-exempt sources (i.e., interest from state or local bonds) and the payee spouse's income is subject to tax, electing to treat alimony payments as nonalimony would keep the payee spouse's overall income lower, while the inability to take a deduction for the payor spouse will be irrelevant. Under Regs. Section 1.71-1T(b), Q & A-8, the spouses can change the election from year to year.

Statement to Treat Alimony as Nonalimony

The taxpayer, Herbert Johnson, and his legally divorced wife, Jane Johnson, hereby elect under Section 71(b)(1)(B) to treat taxpayer's alimony payments as nonalimony. The payments from Herbert Johnson to Jane Johnson, under their divorce decree dated xx/xx/19xx, will not be deductible under Section 215 by Mr. Johnson nor be includible in the income of Jane Johnson under Section 71.

_______________________________

/s/ Herbert Johnson

SSN 123-45-6789

_______________________________

/s/ Jane Johnson

SSN 987-65-4321

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Date

{Attach agreement}