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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1237
Experience:  US Taxation specialist.
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My wife and I are unfortunately getting a divorce. The

Customer Question

My wife and I are unfortunately getting a divorce. The situation will be:
1) I make $350k/year; she will have no other income other than alimony ($5k/month), plus $3500/month in child support.
2) We have three children, who will reside with her, though we share custody
3) Because of my income, I'm not eligible for a lot of the student loan interest deductions, etc
This divorce is fortunately amicable, so we're each willing to sign tax waivers, etc to create the most favorable federal tax situation for me filing singly. Which would be the best option:
A) I pay the above alimony and child support and assume both the tax liabilities for them, as well as claim the children for deduction/credit purposes (after she signs a waiver allowing me to do so).
OR
B) She claims the children and reports the alimony as taxable income, in which case I would increase the amount of alimony by her tax liability (so she winds up with a net of $5k/month plus child support), and deduct that from my taxable income.
Any advice would help.
Submitted: 1 year ago.
Category: Tax
Expert:  USTaxAdvising replied 1 year ago.

Hello,

Here are my thoughts on your two options.

A) Alimony is not taxable to you but it is taxable to her regardless of whether or not you deduct it from your gross income. Alimony is taxable to the recipient. You can only claim the children as dependents if she signs a written declaration stating that she will not claim the children on her tax return as dependents.

See Publication 504 here - http://www.irs.gov/publications/p504/ar02.html#en_US_2014_publink1000175898

B) I think this is the best option. You should deduct the alimony from your taxable income. If the alimony does not change as your income level rises then the alimony deduction will greatly reduce your tax liability. You are in a much higher tax bracket so the savings of deducting the alimony is much higher than her paying tax on it. For example if you deduct 60K in alimony that is approximately a tax savings of 19,800 (33%) she would pay tax on 60K at 25% or 15,000. So you save 5,800 but deducting the alimony. If your taxable income is going to increase in the years to come then the savings get even higher as your tax rate will change.

I hope that provides the information you were looking for. Please let me know if you have any follow up questions and I will get back to you as soon as I can.

Best regards,