Question

What do you think about the posted articles?

- The determination of alimony versus child support is very complex, and ultimately up to the attorneys and the courts, but I frequently have conversations with clients about how to structure payments to an ex-spouse in the most beneficial way for tax purposes.

- Technically speaking, every raffle prize is taxable income, which I’m sure would come as a great surprise to most people. Think about all of the Fire Dept raffles, PTO drawings, community fundraising activities….The Oscar Gift Bags are clearly way over the top of what most of us will receive, but it illustrates the concept of taxable income from a prize, as the guy who won free donuts learned the hard way.   

Answer 1

A. A. Child Support As a general rule, child support payments are not tax deductible for the parent paying the support and not taxable income for the parent receiving the support.In other words, if a spouse pays child support, that spouse cannot deduct it on a tax return. If a spouse receives child support, the amount that spouse receives is not taxable. While alimony, discussed below, is considered a taxable event, child support is always tax-neutral, meaning it does not affect the spouses’ taxes in any way.

B. Alimony Alimony refers to spousal support payments—sometimes called spousal maintenance payments—that meet the requirements for “alimony or separate maintenance payment” under section 71. Unlike child support payments, alimony payments are tax deductible for the spouse making the payments,and the payments are taxable for the spouse receiving the payments.

In order to qualify as alimony, the support payments must meet all of the following strict requirements:

1. The payments must be required under a divorce or separate maintenance decree or written separation agreement.Accordingly, spouses facing extended divorce proceedings due to financial issues, custody disputes, or state laws that require extended periods of separation may have trouble qualifying for the deduction.

2. The payments must be paid in cash, which includes checks and bank deposits.Payment in the form of other items—such as stocks, bonds, or physical objects—are not considered alimony.

3. There must be no liability for payment after the death of the recipient. A taxpayer may not deduct a payment as alimony if the obligation does not terminate after the death of the recipient. An agreement or applicable state law must show that the obligation would terminate on death.

4. The spouses may not live in same household. If the spouses continue to share a residence after the divorce, any support payments made during that time cannot be deducted.

5. The divorce or separate maintenance decree may not designate the payment as anything other than alimony—for example, child support.If a spouse makes payments under a divorce decree, separate maintenance decree, or written separation agreement, that spouse may be able to deduct the payments as alimony, provided the payments qualify as alimony for federal tax purposes.If the decree or agreement does not require the payments, then the payments do not qualify as alimony.

In most cases, alimony will lower the tax bill of the spouse making the payments. Alimony is an above-the-line deduction, which means the paying spouse does not need to itemize in order to benefit from the tax advantage and taxable in the hands of receiving spouse.

2.

In the USA, what qualifies as “taxable income” is defined in the Internal Revenue Code Section 63. “Gross income” is defined in Section 61 of the Internal Revenue Code.

Taxable income can encompass more than just your annual salary. Taxable income can include profits from stocks or real estate sales, winnings from the lottery, betting the dogs or horses, and winnings from any casino (domestic or abroad). Even the cash value of bartered items is considered taxable income.Hence even effect any one have earned the income easily or by luck, or even through hard work, they are required to pay tax on it.