Alimony, Child Support, and Taxes: What You Need to Know

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One of the most important things you need to understand before signing a marital settlement agreement or asking the court to award you child support and alimony or spousal support is the tax consequences of receiving these payments. By comprehending the tax ramifications, you will be in a better position to work out the most advantageous payment structure for your situation.

Child Support and Taxes

Unlike alimony or spousal support, payments made for child support are for the benefit of your children and will not be considered “income” for tax purposes. This means that when completing your yearly tax return, you do not need to claim child support as income. Likewise, your former spouse will not be able to claim their child support payments as deductions. Accordingly, payments made for child support are often referred to as being paid in “after-tax” dollars.

Alimony and Taxes

On the other hand, alimony payments are almost always considered income if your marital settlement agreement or final divorce decree is structured correctly. This means that you must claim alimony payments as income on your tax return, and your former spouse is entitled to claim the payments they made to you as deductions.

Requirements for Alimony to Be Considered Income

In order to be considered “income” for federal tax purposes, several requirements must be met:

  1. The alimony obligation must be memorialized in an incorporated marital settlement agreement or final judgment of divorce, meaning the obligation is court-ordered.
  2. Alimony payments must be made in cash.
  3. You and your former spouse cannot file joint tax returns for the applicable tax year, and you cannot cohabitate or live in the same household.
  4. The payments cannot be disguised as child support or property distribution.

Your experienced family law attorney will draft or review your marital settlement agreement to ensure it complies with the law and reflects you and your ex-spouse’s mutual understanding of the tax consequences.

Tax Benefits of Structured Alimony Payments

Properly structured alimony payments can help shift income from a higher tax bracket to a lower one, providing financial savings to both you and your ex. For instance, if your former spouse is in a combined local, state, and federal tax bracket of 40%, while your combined bracket is 30%, shifting income from your ex-spouse’s tax return to yours could reduce taxes by the difference in your tax brackets, or 10%.

Non-Taxable and Non-Deductible Alimony

You and your former spouse can also decide that alimony payments will neither be taxable as income nor deductible. This is permissible as long as the benefit is reciprocal (both non-taxable and non-deductible) and clearly stated in your court-ordered settlement agreement or final judgment of divorce.

Conclusion

If you are considering divorce and are concerned about the tax consequences of structured alimony and/or child support payments or have any other family law issue, speak with a qualified family law attorney at the DiPietro Family Law Group. Our attorneys can review the facts of your specific situation and fight for your rights and desired outcome. We have decades of experience in family law matters and are here to help you!

Call us today to schedule a consultation at (888) 530-4374 or visit us online.