Why the different policies on alimony vs. child support?

A student raised a very interesting issue in a class discussion journal: why does tax law treat alimony differently from child support?

In particular, it seems that the taxpayer who makes a payment designated as "alimony" to an ex-spouse is better off (from a tax perspective) than if the taxpayer paid the exact same amount of money designated to the expspouse but it was designated as "child support."

Since publicy policy generally tries to promote the goal of supporting children so they don't grow up in poverty, the student quite understandably wondered why the taxpayer who pays child support doesn't get to deduct it in just the same way as the taxpayer who pays alimony does.

First of all, let's consider the tax treatment of alimony, which is money for spousal support after divorce or legal separation. Tax law allows the payer of alimony to deduct it, but the receiver must report it as taxable income. When you think about the Haig-Simons definition of income as "the increase in potential to consume," this makes perfect sense. The payment of alimony reduces the potential consumption by the person who pays it and increases the potential consumption of the person who receives it. (It should be noted, by the way, that alimony is less and less common these days. Some consider it a holdover from a time gone by when women were generally not in the labor market.)

What about child support? Why should that be treated differently from alimony?

Well, if we treated child support exactly the same way as alimony, we would allow the payer to deduct it, BUT, a perfectly analogous treatment would also require the receiver of the child support (which would hopefully be the children!) to pay taxes on that child support.

But public policy also suggests that we would want the full amount of any child support paid to go to the children (and having them file tax returns would generate additional complexity as well.)

But there is a broader issue here: current tax policy gives the lion's share of the tax benefits associated with children to the custodial parent, and the non-custodial parent often gets very little in the way of tax benefits for paying child support.

Some custodial parents do exercise the option to sign a Form 8332 giving away the dependent exemption and the child tax credit to the non-custodial parent, but this seems relatively uncommon in practice. Our VITA site typically deals with only a very few Form 8332's each year.

As my students know, New York State now redresses a little bit of this inequity through a non-custodial earned income credit. A custodial parent receives a NYS Earned Income Credit equal to 30% of the federal EIC. The non-custodial parent who makes all child support payments on time receives a NYS non-custodial EIC which is 20% of what the federal EIC would have been if he had been the custodial parent.

Here's a link to a 1997 article called Noncustodial Parents, Child Support and the Earned Income Tax Credit by Laura Wheaton and Elaine Sorenson, published by the Urban Institute, that addresses some of these issues. Note that the definition of "Qualifying Child" has changed since the article was written and some of the figures are out of date, but many of the issues highlighted by the authors remain important.

I'm not aware of any other states that have followed New York's lead in giving a non-custodial Earned Income Credit to parents who make required child support payments. However, New York's policy is relatively new, as it was enacted in 2006. The Mott Foundation has funded a Columbia University grant to study its impact, and perhaps other states will adopt similar policies in the future.