Tax Aspects of Alimony

Alimony usually is treated as income to the recipient and a deduction from income to the person paying alimony. This can result in a savings in the combined income tax payments of the husband and wife. The reason for the savings is that if one spouse earns less than the other, additional income (in the form of alimony) to the spouse who earns less will be taxed at a lower rate than if it was treated as income to the spouse who earns more.

Assume a husband and wife are about to be divorced. Before payment of alimony, the wife has a taxable income of $10,000 and the husband has a taxable income of $70,000. If they each were to pay taxes on these amounts, their combined tax liability would be $15,390. (The husband would pay $14,244; the wife would pay $1,146, applying the 2004 federal tax tables for single filers).

If the husband were to pay the wife $20,000 per year in alimony, his taxable income would drop to $50,000, and the wife’s taxable income would increase to $30,000. Their combined federal income tax payments then would be $13,488 ($9,244 by husband and $4,244 by wife). The savings on their combined tax bills would be $1,902 over what would be paid if the alimony payments were taxable to the husband.

The wife’s tax bills have gone up, but so has her income.