Many people forget to consider the tax implications of spousal or child support before they file for or finalize their divorce. Although taxes may not be one of the first things divorcing couples think about, there are some definite tax advantages to consider before negotiating support agreements. Separating couples should discuss their options with both a qualified tax professional and a family law attorney before filing for divorce.
Generally, spouses who receive child support payments do not have to report them as income on their taxes, and spouses who pay child support cannot claim the payments as tax deductions. When it comes to spousal maintenance or alimony, however, the reverse is true. Spouses who receive support payments must record these payments as income while spouses who pay alimony may deduct the payments on their taxes.
The difference in tax reporting rules for child and spousal support present some tax planning opportunities.
For example, if paying spouses negotiate to pay more money in alimony and less in child support, these spouses would have the tax advantage in deducting the higher spousal support amount. The spouses who are the receivers of both alimony and child support, however, would benefit more from higher child support payments, which they would not have to report as taxable income.
Maximizing the potential for tax savings for either spouse seems like a great strategy. However, because child support payments are calculated according to a state's established statutory formula and the Internal Revenue Service (IRS) monitors and regulates changes to both spousal and child support payments, couples should understand that realizing these tax breaks could be difficult.
The IRS has multiple regulations, commonly known as the child contingency and recapture rules, which seek to prevent any abuse that might occur between divorcing spouses trying to take advantage of the alimony versus child support tax benefits.
The regulations guard against a spouse paying an excess amount of alimony immediately following a divorce and a spouse reducing or eliminating spousal maintenance payments on or around a date that corresponds with an event contingent upon the child, like one or more of the children reaching a certain age. In this case, the payer spouse would have to report the reduction as income, and the receiver spouse could deduct it, under the recapture rule.
You should know about the tax advantages related to spousal and child support before you agree to any maintenance amounts, so that your negotiations will result in a mutually beneficial arrangement.
If you and your spouse are contemplating divorce, or you recently filed, contact an experienced tax professional and a family law attorney in your area to discuss the available tax options for your unique financial situation.
