Spousal Support and Income Tax

May 7, 2010 – 2:04 pm

An issue arises from time to time where one spouse has an obligation to pay spousal support to the other spouse, after a relationship has failed. The issue is income tax. Spousal support payments are one area of family law where tax savings may be possible.

If spousal support is being paid, the payor may be able to deduct the payments made, from their taxable income. At the same time, as always, what is a tax savings to one person is a tax burden to the other. The recipient of the support payments, has to declare, and pay income tax on, those payments.

Care should be taken however. The deduction will only be allowed if the payments are periodic and pursuant to an written agreement or Court Order. For example a ”one-time” lump sum payment, of spousal support, is not going to be tax deductible to the payor.

As well, any agreement to pay periodic spousal support, needs to be in writing, an oral agreement to pay will not be sufficient. If periodic payments have been made (usually monthly), prior to a written agreement, it may still be possible to have those earlier payments, made tax deductible in the agreement, if the correct wording is used.

Deductibility of spousal support payments offers a rare example of a possible win/win for parties from a income tax point of view. If a payor earns more than the recipient the amount of tax saved by the payor may be more than the amount of additional tax paid by the recipient on the spousal support payments. Depending on each person’s income, the payor could also agree to protect the recipient from any additional income tax incurred. In those circumstances, each side would either end up either paying less tax or in the case of the recipient, having more money to spend, with no increased taxes to pay.

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