Alimony, child support and taxes: What you need to know

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.

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.

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.

 In order to be considered “income” for federal tax purposes, several requirements must be met. First, the alimony requirement must be memorialized in an incorporated marital settlement agreement or final judgment of divorce, meaning the obligation is court ordered. Second, alimony payments must be made in cash. Third, you and your former spouse cannot file joint tax returns for the applicable tax year, and the two (2) of you cannot cohabitate or live in the same household. Moreover, the payments cannot be disguised as child support or payment to satisfy property distribution provisions of your settlement agreement or divorce judgment. Your experienced family law attorney will draft a marital settlement agreement for you or review the court’s divorce judgment to ensure it complies with the law and reflects you and your ex-spouse’s mutual understanding of the tax consequences.

Additionally, properly structured alimony payments can help shift income from a higher tax bracket to a lower one, which provides financial savings to both you and your ex. For instance, suppose your former spouse is in a combined local, state and federal tax bracket of 40%, while your combined bracket is 30%. By shifting income from your ex-spouse’s tax return to yours, the taxes on that income would be reduced by the difference in your tax brackets, or 10%.

You and your former spouse can also decide that you want alimony payments to neither be taxable as income or deductible. This is permissible, so 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.

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

Call us today to schedule a consultation at (703) 370-5555 or visit us online.

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