If you’re divorced, you need to know the tax implications of child and spousal support paid or received. Miller Law Group, P.C., explains how the wording of your divorce agreement may affect the income or deductions you claim on your tax return.
With income tax filing deadlines bearing down, many divorced spouses are looking at the tax implications of their separation agreements or judgments for the first time, or maybe they are revisiting a recurring tax issue. The IRS has very strict rules and regulations as to what is taxable income and what is deductible when it comes to people who are divorced.
For income tax purposes, in general, any alimony paid or received is deductible from the gross income of the person who pays and is included as taxable income by the recipient.
Child support, however, is neither deductible by the person who pays nor taxable to the recipient. Therefore, child support has no tax implications for either spouse. It is important to note that although a parent paying child support cannot deduct the child support payment from his or her gross income, there may be qualifying tax deductions or exemptions the supporting parent can elect, including head of household, child tax credits and certain medical, education and child care expenses. Consult with an experienced tax professional to determine which credits may apply to you.
Unallocated alimony and child support, sometimes referred to as “family support” or “spousal support” may be taxable and/or deductible. Typical language found in your separation agreement might be “unallocated family support” or “spousal support for the benefit of the wife and the minor children.” For a support payment to be deductible and taxable, the payment must not be specified as child support. Typically, family support and spousal support are set for a fixed duration upon the receiving spouse’s death, remarriage and/or retirement. A support obligation that is fixed upon the child, such as the child reaching emancipation, is generally viewed by the IRS as child support.
Why is the designation of “unallocated” support important?
The benefit of designating support payments as unallocated, as the name implies, gives the parties the freedom to decide for themselves how the support is to be paid, while also giving either or both parties possible tax benefits.
If implemented correctly, an unallocated spousal support payment may allow the parties to benefit from a higher net transfer of funds to the receiving spouse. This works because the person paying the support is generally in a higher tax bracket and can afford a larger support payment because he or she will receive a tax deduction for the support payment.
If you would like more information on the tax implications of spousal and child support, or if you have other questions about divorce, contact any of our experienced divorce and family law attorneys by calling (508) 502-7002.