Just when you thought your life, and your divorce, couldn't get more complicated, there are taxes. And if you're a mother going through divorce, there are a number of issues you need to be fully aware of as it pertains to child support and alimony as you negotiate the final terms of your divorce.
While on the surface, the facts below may appear hard to grasp, I've tried to boil everything down to the brass tax. The bottom line here is you need to have a smart lawyer by your side that understands the ramifications and tax consequences as you negotiate your divorce settlement.
Additionally, it wouldn't hurt to have a savvy divorce financial planner in your corner as well.
The following is a list of some very important facts you should be aware of regarding child support, alimony and your taxes:
- Alimony is always deductible in your federal income tax, but child support is not.
- However, child support payments are not taxable to the recipient. Actually, the former spouse must report the full amount as if it is earned income, and he/she must also provide the ex's social security number. Failure to do so may result in a $50 penalty and disallowance of the payment as a deduction.
- Even though alimony is taxable to the recipient, the payor gets a deduction for it, unlike the payment for child support. Or more simply, the payor reduces taxable income by paying alimony and the recipient increases taxable income by getting alimony.
- Additionally, if the spouse chooses, the alimony payments can be tax-exempt to the receipient if the payor will not receive the deduction, essentially treating alimony payments like child support.
- Since alimony payments do impact deductions and reportable income for both parties, you and your ex husband should consider and plan on the tax consequences of divorce.
- IRS rules can be even more complicated and strict, so it's important for couples to secure clarification in order to get the benefit of the law. I've known women who failed to understand that alimony is fully taxable, simply because they confused alimony and child support. So it's important to know the facts and the differences.
- Most importantly, for alimony to be deductible by the payor, it must be required under a divorce decree or a separation agreement. The money must be paid in cash, check or money order and ends at the death of the receiving spouse. Both parties must be living in separate households and file tax returns, individually.
- Divorced couples must be cautious about co-mingling alimony and child support. Alimony and child support payments may have complicated tax effects which become a challenge for divorced couples.
- In the negotiations during your divorce, it's important that your lawyer should use alimony deduction as a bargaining tool. Why? because $100 of child support is not the same as $100 of alimony (essentially, $100 of child support with no deduction is the same as $154 of alimony (with a deduction of 35% taxed income).
Click the following for a list of resource articles about how to financially plan for your divorce