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/
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.
LPL Tracking #664416
