The Money Side of Divorce

While divorce may end a marriage, it doesn’t end obligations to one another. In many relationships, one spouse is more financially well-off than the other. In a divorce, this earning discrepancy means that the poorer partner is entitled to receive spousal support, or alimony, to help him or her establish a new, post-divorce life.

Alimony may be paid in one lump sum or on a temporary or permanent basis. The court typically will consider the circumstances of each partner when deciding how much and for how long assistance is needed.

The general rule is that alimony is deductible, while child support isn’t. If you are receiving the payments, then you must count this money as part of your gross income.

Taking estate planning into account may help you design a divorce agreement that minimizes the total taxes you and your soon-to-be-ex spouse will owe. If the person making payments will be in a higher tax bracket than the person receiving money, it might make sense to pay more in alimony for tax-deduction purposes. On the other hand, if you’re not in a higher tax bracket, it might be better to transfer more property immediately after the divorce than to pay more in alimony later on. Alimony payments might not have as much of a tax advantage, and maybe it will be easier to settle everything right away if possible.

Considered separately, child support is payment to help raise young children. The custodial parent who is set to spend more time with the kids generally receives child support because he or she will spend more money on child care. These payments typically end when the children reach the ages of 18 (or in some cases, 21). Unlike alimony, there is no tax deduction for child support. And the person receiving child support doesn’t need to pay income tax for receiving this money.

You can continue to claim your child as a dependent on your tax return if the divorce decree names you as the custodial parent. If the decree is silent on that point but your child lived with you during the year for a longer period of time than he or she did with your ex, you would be considered the custodial parent — and thus eligible for the exemption.

It’s possible for the noncustodial parent to claim the exemption if the custodial parent signs a waiver pledging that he or she won’t claim it. If you’re the parent who claims the dependent exemption, you’re also the one who has the right to claim the child credit or an American Opportunity or Lifetime Learning college credit. So if you can’t claim the exemption, you can’t claim those credits, even if you pay the college bills.

To recap, if you’re the spouse who is paying alimony, you can take a tax deduction for the payments — even if you don’t itemize deductions. Keep in mind, though, that the IRS won’t consider the payments to be true alimony unless they are spelled out in the divorce agreement. Your ex, meanwhile, must pay income tax on those amounts. The opposite is true for child support: The payer doesn’t get a deduction, and the recipient doesn’t pay income tax. But be sure you know your ex’s Social Security number. You have to report it on your tax return to claim the alimony deduction.

 

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