The general rule is that for an amount to qualify as a support amount it must be paid directly to the recipient, and the recipient must have control over how the funds are spent. However, following a separation, it often happens that the person who was, during the marriage, responsible for the payment of certain expenditures, such as property taxes on the family home, will continue to pay those amounts directly to a third party. Such amounts can be treated for tax purposes as support amounts; however, it’s important to structure such payments carefully, as seemingly insignificant differences in the way the payments are made can have unintended and unwelcome tax consequences. The general rule in this area is that payments made directly to third parties may be deducted by the payor and included in the income of the recipient where the following criteria are met:
- the payments are made, under an order or agreement, for the benefit and maintenance of the recipient spouse;
- the payments are made at a time when the payor and the recipient were living separate and apart; and
- the court order or written agreement specifies that the recipient will include the amounts in income and that the payor can deduct them.
For example, where a former spouse continues to make property tax or insurance premium payments on the family home in which his former spouse and their children continue to live, he would be able to deduct such payments from income, and his former spouse would include them in her income, assuming that the three criteria listed above are satisfied. This is also often the case in the tax treatment of spousal support payments.
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