Alimony can be a very emotional issue. Take the extreme example of Las Vegas millionaire Darren Mack who murdered his ex-wife, Charla, and hired a sniper to shoot the judge who ordered him to pay her $10,000 a month in spousal support. Mack really didn’t want to pay alimony.

Macabre scenarios aside, you could use alimony to your advantage. Some couples rush to finalize their divorce — they just classify spousal support as non-taxable and non-deductible. On the surface, it seems like a convenient and harmless decision, but you could end paying a lot more taxes on top of spousal support. Don’t make this mistake.

Unlike child support payments (which are non-taxable), alimony is taxable to the recipient and tax deductible by the payer. In most cases, the IRS allows alimony to be deductible, but if you’re the recipient and have to pay taxes, it doesn’t mean you’re losing out.

The point is, look at the big picture. Your ex and you could pay less taxes altogether — what you are doing is shifting money from the higher income spouse to the lower income spouse, which means the higher income partner moves down to a lower tax bracket. In turn, it will be more attractive to the payer be more generous to the recipient because of the overall tax savings.

The IRS has fairly strict rules on what is considered as alimony. When couples first separate, it is common practice to just split the bills (for example, you pay the household expenses, while he pays the mortgage), but in the eyes of the IRS, these are just direct payments and not alimony.

Here are the basic rules of alimony to follow so you will get it right with Uncle Sam. Some of them are fairly simple, but real-life divorces can get very complicated, so it is good to keep these points in mind.

*Pay your alimony in cash or check.

*Live apart. Payments can only be made after a physical separation.

*Make payments according to your divorce papers.

*Ensure there is a statement in the divorce contract that clearly labels the payments that are deductible by the payer and taxable to the recipient.

*Make sure there are clauses to include major life events like death and remarriage. Payments should stop in these scenarios.

*Maintain a clear boundary between alimony and child-related events. For example, if your divorce papers state that your alimony will stop when your child is emancipated or of legal age, there’s a possibility that the backlog of your alimony could be reclassified as non-deductible child support. Then, in which case, you would have to pay back the taxes you owed. Another situation to avoid is not defining child support and alimony payments. What could happen is the courts will lump together all payments as spousal support, which means the recipient would have to contend with heavy taxes.

*Avoid giving too much alimony in the first three years. At first, the lower tax rates may seem alluring, then you throw in a big dose of guilt and your ex could use a bit more cash, and you make the decision to make out fat alimony checks. Stop there because excessive payments could be subject to being taxed to the payer in the third year of your separation.

Related posts:

1. Alimony: A thorny part of divorce – Part 3: Types of alimony
2. Alimony: A thorny part of divorce Part 2 – Factors that determine alimony
3. Alimony: A thorny part of divorce Part I – A Prologue: More men are receiving alimony

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