It is common in most divorces for one spouse to pay some form of child support or alimony payments to the other spouse after the divorce.
Alimony payments (sometimes referred to as spousal support or maintenance) are payments from one divorced spouse to the other and are awarded when one of the parties can’t meet his or her reasonable needs through appropriate employment.
Child support payments, on the other hand, are intended to ensure children of divorced parents maintain the same standard of living he or she would have had if the marriage had remained intact.
Although each state has different rules on how these payments are awarded and calculated, the IRS has one set of rules on how it treats such payments, and divorcing parties need to understand these rules. In general, alimony is deductible by the paying party, while child support payments are not.
Alimony Tax Treatment
A party that receives alimony payments must include those payments in his or her gross income and pay income taxes on that income. As a result, the party making the alimony payments can deduct those payments from his or her gross income.
However, according to IRS rules, payments may only be treated as alimony if:
The parties do not file a joint return with each other,
- The payments are made in cash (including checks or money orders),
- The payment is received by (or on behalf of) one of the divorcing parties (for example, if the paying party pays the recipient’s landlord directly),
- The divorce or separate maintenance decree or written separation agreement does not say that the payment is not alimony,
- If legally separated under a decree of divorce or separate maintenance, the parties are not members of the same household when the payments are made,
- The paying party has no liability to make the payment (in cash or property) after the death of the recipient, and
- The payment is not treated as child support or a property settlement.
The IRS also explicitly states that the following cannot be treated as alimony: child support payments, non-cash property settlements, payments that constitute a spouse’s part of community property income, payments to keep up the payer’s property, and use of the payer’s property.
Child Support Tax Treatment
Unlike alimony, the IRS does not allow a party paying child support to deduct those payments. This is because child support is intended to support the child, not the other divorcing spouse. Consequently, child support payments are not to be treated as gross income for the receiving party.
However, one of the parties may be eligible to claim a dependency exception for the children. The party claiming the exemption should be the party agreed to by the parents or as otherwise ordered by the court.
How to Plan
The tax treatment of these payments and the right to claim deductions can have a big impact on your financial situation during and after a divorce. For this reason, it is usually a best practice to seek advice from experienced family law attorneys, and we welcome your call or email anytime.
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*This article is very general in nature and does not constitute legal advice. Readers with legal questions should consult with an attorney prior to making any legal decisions.