Alimony, Child Support and Taxes
Individuals going through a divorce must consider that child support or alimony they are paying or receiving is taxable or tax deductible.
If you’re going through a divorce, you may have questions about alimony, child support, and taxes. The IRS governs what can be taxed and the general rule is: alimony is deductible while child support is not. Although tax laws can be complex and for that reason, seem intimidating, knowing some of the rules can give you a leg-up during settlement negotiations or at least a heads-up to how your federal tax responsibilities will change upon divorce.
Alimony Tax Rules
Alimony is still the word used for tax purposes, even though the law in most states refers to these payments as spousal support or maintenance. Either spouse may be on the hook for alimony. For the rules specific to Arizona, see the article, Understanding and Calculating Alimony in Arizona.
If you are the one making alimony payments, then you should be able to deduct those payments from your gross income when you file your taxes. If you are the one receiving payments, then you must count this money as part of your gross income. To count as alimony, payments must fit within the five rules below. If they don’t, the paying spouse will get fewer deductions (meaning, a higher tax liability) while the receiving spouse’s income will be (resulting in a lower income tax).
Alimony payments must be:
- paid in cash – which means more than dollar bills, explained below
- received by or on behalf of a spouse
- made while the spouses are not members of the same household
- ending when the spouse receiving payments dies, and
- not earmarked for some payment other than alimony.
The terms "cash payments" are misleading. Payments can be a check or money order, too. They can’t, however, be a service. For example, the paying spouse can’t offer to cut your hair or clean your house instead of paying your alimony.
On the other hand, the paying spouse could pay a portion of your alimony to someone else on your behalf, if that is what a court has ordered or what the two of you have agreed to do. This might happen in cases of tuition, or rent, or a mortgage payment. In other words, the paying spouse pays the school or landlord or lender directly, on the recipient spouse’s behalf, as part of the alimony payment.
Payments don’t count as alimony for tax purposes if the two of you are divorced or legally separated and still living under the same roof. This is a little slippery because a couple could have separated, but not have a court order making them legally separated. Without this separation order, then payments – usually temporary alimony payments – could still count as alimony for taxes even if the two still live in the same place, but file their taxes separately.
It makes sense that you shouldn’t be able to write off alimony payments to a dead spouse. The tax code, however, isn’t always intuitive. So if you have an agreement with your spouse to pay alimony for 15 years without a provision that payments cease when this spouse dies, and if this spouse dies prematurely, then you will face a tax penalty. For example, if you agree to pay for 15 years (with no provision for death within that time) and the receiving spouse dies at 10 years, you may need to pay this spouse’s estate for the remaining five years of the agreement and, you will not be able to deduct those payments from your gross income for tax purposes.
Finally, whatever you agree to pay as alimony in your separation agreement or are ordered to pay in your divorce can’t be counted twice. In other words, you can’t take a tax deduction on the same money more than once.
Child Support Tax Rules
Different from alimony, child support payments are not deductible by the parent who makes the payments. Likewise, child support does not count toward the receiving parent’s taxable gross income. Either parent, however, may be entitled to a dependency exemption per child. Who gets the exemption depends on what the parents agree to, or what the court orders.
Generally, if the parents can’t come up with a plan on their own that allows each parent to take fair advantage of the tax exemptions for dependent children, the court will create a reasonable schedule based on each parent’s proportional share of the total income available to support the child (or children). For example, let’s say the custodial parent makes $33,000 a year and the non-custodial parent makes $67,000. Proportionally, the custodial parent provides 1/3 of the total amount of income ($100,000) and the non-custodial parent provides the remaining 2/3. If there were only one child, then the custodial parent could take the deduction the first year. Then the non-custodial parent could take the deduction for the next two years. This pattern would then be repeated.
There are some exceptions to this, however. If the parent with a present right to take a dependency exemption gets no tax benefit from claiming the exemption, then the other parent can take it. Also, if a parent has a history of missing child support payments, then a court could take away this dead-beat parent’s right to take the dependency exemption.
Child Support Tax Penalties
A parent who is having trouble keeping up with child support payments should seek a modification in the support order as soon as possible. There are many good reasons for this, but missed payments also cause a headache for the delinquent parent’s taxes. This is because this parent’s tax refunds could be garnished to pay back support. Also, depending on how payments are structured, there is a chance that no part of the delinquent payment is deductible as alimony.