Getting a divorce is complicated to say the least. As divorce rates continue to rise in America, the tax system has been forced to create designations of various types of spousal support. The most common way to structure alimony is that the individual with higher income is required to pay the individual with a lower income. However, the specifics on how payments are made and consequences for nonpayment are dictated by state law. However, the classification under the tax code of the spousal support dictates the tax treatment. Spousal support can be most commonly classified as either Alimony or child support. Each type of support is granted by the signing of a divorce decree.
Tax Treatment of Alimony:
What is Alimony? This is a type of spousal support that is typically granted to the divorcee in a case when children are not in the picture.
Brass tax: Alimony is no longer deductible. The rules for reporting alimony have recently changed. After the Tax Cuts and Jobs act passed, the tax treatment for how alimony was categorized changed, and is in effect for the tax treatment of alimony for the 2019 tax year and onwards. Prior to the TCJA, alimony payments were deductible, as an above-the-line deduction, by the person who pays, and was reported as income to the recipient of the alimony.
As of the 2019 tax year, alimony payments are no longer tax-deductible, and the recipient of the alimony does not have to report the money received as taxable income. This characterization applies to divorces filed after December 31, 2018. The recipient of the alimony will not include the amount in their gross income when they file their taxes.
Tax treatment of Child Support:
What is Child Support: This is a form of spousal support that is granted to a divorcee with the specific intent for the funds to be used on the child of the ex-spouse. There are certain events that trigger a re-classification of the payment, such as when the child reaches age of maturity.
Brass Tax: Child support is not deductible by the person who pays it, and the recipient of the child support does not include the amount received as taxable income when filing taxes.
Now that you know the difference and understand the tax consequences of both Alimony and Child Support, you might be thinking: Which one is better?
While the previous answer was that the payor of alimony received a favorable tax treatment, while the recipient of the child support received a favorable tax treatment; but, after the TCJA, neither payment has a tax advantage for the payor. However, even after the TCJA, there is a tax credit for the individual who claims the child as a dependent with the dependency exemption and specific childcare tax credits. This is important to consider when you are structuring who will pay child support because it is important to look into the consequences based on each divorcees applicable tax bracket. It is in any event in both parties’ interest to understand the tax consequences and speak with a specialist. It is advisable to contact a qualified divorce specialist to discuss the possible tax implications of your specific situation.
If you or someone you know would like more information related to the taxation of Alimony, please reach out to our team. We are ready to help you.