Individuals going through a divorce often have many things to consider. One of those considerations that often is overlooked is whether the child support or alimony (a.k.a. spousal maintenance) they are paying or receiving is taxable or tax deductible.
Child Support
For federal income tax purposes, child support is NOT TAXABLE to the parent receiving the support payment. Therefore, the child support received should not be reported as income by the receiving parent. Conversely, child support payments made are not tax deductible and do not offset the gross income of the parent making the payment. An important consideration in the State of Arizona is that, in addition to the non-taxation of the payments, Arizona courts will also divide the tax exemptions for the children. Typically, if Parent A makes twice as much as Parent B, the court will order that Parent A claim the tax exemption for the children two out of every three years. So, Parent A will be able to claim the child's tax exemption in 2010, 2011 and Parent B will claim the child in 2012. If Parent A has not paid all of his/her CURRENT child support for 2010 or 2011, however, then he/she will not be allowed to claim the exemption. He/She can still have an arrearage and claim the child, but the CURRENT payments must all be made. Obviously, if you have questions, you should contact an attorney.
Spousal Maintenance/Alimony
Alimony or spousal support payments are TAX-DEDUCTIBLE for the person making the payment and TAXABLE as income to the recipient. This may come as a shock to the recipient when filing his/her taxes the following year and may lead to a significant tax liability if appropriate adjustments are not made to ensure that the right amount of taxes are being withheld. If you receive $1,000 per month in alimony, your income for the year will be $12,000 higher than your wages and may place you into a higher marginal tax bracket. To ensure that you are having enough withheld, contact a tax professional to discuss the potential consequences of receiving spousal maintenance. Conversely, if you are paying support, you may consider having less withheld from your paychecks because your income will be lower than your paycheck reflects.
Ensure IRS Compliance
Divorcing parties need to be aware of the tax treatment of the child and spousal support payments to ensure compliance with IRS income reporting requirements. Claiming child support payments as an income deduction or not reporting the receipt of spousal support payments can have serious tax consequences.
