Alimony and Child Support at Tax Time

Alimony and child support are critical financial components often arising during divorce proceedings. These payments can significantly impact both parties' finances, particularly during tax time. Understanding how these payments are taxed may ease some concerns and provide clarity at tax time.

This article explains the differences between payments from a tax filing perspective.

Alimony vs. child support: What's the difference?

Alimony, also known as maintenance or spousal support, is a payment made by one ex-spouse to the other after divorce. It helps offset any economic unfairness resulting from divorce, mainly when one spouse financially depends on the other during the marriage.

Child support, on the other hand, is a payment made by the noncustodial parent to the custodial parent to assist with the costs of raising a child.

How alimony is taxed

The Internal Revenue Service (IRS) treats alimony payments as taxable income for the recipient and tax-deductible for the payer. However, the Tax Cuts and Jobs Act (TCJA) initiated significant changes in the taxation of alimony in 2019.

Under this law, for any divorce or separation decree executed after December 31, 2018, alimony payments are no longer taxable income for the recipient and cannot be deducted by the payer.

The old rules apply to those divorced before 2019 and still paying or receiving alimony. That means the payer can deduct alimony payments, reducing their taxable income. In contrast, the ex-spouse receiving the alimony must report it as income and pay taxes. If the divorce agreement was modified after 2018, the parties must specify whether the old or new tax rules apply.

Child support and taxes

The tax implications of child support are much simpler and have remained unchanged over time. Unlike alimony, child support payments are not tax-deductible for the payer and do not count as taxable income for the recipient. These payments are considered the noncustodial parent's share of the expenses involved in raising their child. Regardless of how much child support a parent pays or receives, it won't affect their taxable income.

It is also worth noting that the custodial parent—defined by the IRS as the parent with whom the child lived for the most significant part of the year—can claim the child as a dependent and benefit from child-related tax credits. However, claiming as a dependent for tax purposes can be changed if both parents agree and the noncustodial parent files IRS Form 8332, allowing them to claim the child as a dependent. In some circumstances, it may even be beneficial to negotiate the terms of alimony or child support payments in light of these tax laws.

In conclusion, understanding the tax implications of alimony and child support is imperative for individuals who are divorcing or have already divorced and are making or receiving these payments. Remember, tax laws continually change. Therefore, staying updated by consulting financial, legal, or tax professionals for the most accurate information is essential.

Sources:

https://www.hrblock.com/tax-center/income/other-income/alimony-and-child-support/

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/alimony-child-support-court-awards-damages/alimony-child-support-court-awards-damages-1

 

Important Disclosures:

Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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