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Because the payer is in a higher tax bracket than the recipient, there is room to make both parties come out better at the government's expense.

If the payment is characterizable as "alimony" and the amount (in our example) is any amount between $5,548 and $6,593, then both parties come out ahead, compared with a $4,549 characterized as child support or property settlement. Why? Because the tax benefit to the payer is more than the tax cost to the recipient.

In our example, suppose we set the actual payment at the midpoint between $5,548 and $6,593. This would be $6,071. Bob's after-tax cost would be $6,071 minus the tax savings of 31% of $6,071, so Bob's after-tax cost would be or $4,189. This is less than $4,549, so Bob comes out ahead by labeling the payment as alimony -- by $360.

Carol's after-tax receipt would be $6,071 minus 18% of $6,071, or $4,978. Carol comes out ahead also -- by $429.

Both parties come out ahead using the "alimony" characterization as compared with labeling the payment as a "property settlement."

Again, this works because the tax benefit to Bob from the alimony deduction outweighs the tax cost to Carol of including alimony in income. And that happens because Bob is in a different tax bracket than Carol.

If both parties were to have the same tax bracket, this tactic would not work. It would not be possible to make both parties better off at the government's expense by labeling the payment as "alimony" instead of "property settlement."

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