That was an interesting link. It seems like the tax lawyer was saying the interest is taxable BOTH to the payor and the payee...that seems like the government is double-dipping to me, does that seem right?
Though....the interest I pay on my credit cards is not tax deductible to me, and is (I assume) taxable income to the credit card companies, so I guess it's no different then that.
There is some case law on the subject that is very specific to alimony and child support, stating that interest on both alimony and child support obligations is taxable
income to the recipient. Therefore I don't have any doubts on that end. I saw and read that case law. Particularly the interest on child support is a HUGE issue. However, its not an issue for our practice, because our state does not add interest to child support arrearages.
I have not found any tax case law specific to its deductibility to the obligor. (alimony, not child support because child support is definitely not deductible in any way) I have a great deal of trust in the tax attorney whose thread Prosperpina posted, but his case law wasn't as specific to the matter at hand as I would have liked.
As a tax professional, if I had a client in that circumstance I would have to do more research myself before making a decision on that issue. In fact, our office specifically decided not to spend the research time on the issue because alimony is not terribly common in our state and the powers that be felt that the issue would be better researched if and when a client needed it researched.
However...as an example, a person pays tax on the money that they use to pay credit card interest, and the credit card company also pays tax on the net profits that they earn from that same interest money. So its not uncommon to pay tax on interest twice, or on any money that is spent for any purpose for that matter. If you think about it, tax is paid on the same money sometimes dozens of times.
I suggested a consult with a tax attorney because I believe that the issue is important enough, particularly if the amount of interest is high, that someone needs someone who is obligated to fully research the situation for them and to make a determination based on full research.
However, if the amount was low, and not worth the cost of the research, I likely would take the more conservative approach and not deduct it.