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The Fundamentals of Spousal Support Taxation

The substantial divorce rate in America—50% of marriages end in divorce—has engineered the creation of various types of spousal support through which one ex-spouse is required to pay the other. In most cases, the higher-earning spouse is required to pay the lower earner a certain amount, although there are exceptions to this.

The tax rules use to be different based on what kind of support was provided, with alimony payments being tax deductible. However, under the Tax Cuts and Jobs Act of 2017—which made many modifications to existing tax laws—that is no longer the case. This article explores the factors that determine how spousal support is classified and subsequently taxed.

Key Takeaways

  • Alimony and child support are the two types of financial assistance that are awarded to ex-spouses, depending on the circumstances.
  • In the past, alimony was tax deductible for the payor and reportable as taxable income by the recipient. Following the passage of the new tax law, neither of these rules is true.
  • Child support payments have never been tax deductible and remain unavailable to report as a deduction.

Types of Spousal Support

There are two main types of support that are awarded to ex-spouses today: alimony and child support. Both types of support are awarded by a divorce decree, written agreement of separation, or decree of support. Failure to pay either one can result in further legal action, including garnishment of tax refunds of the payor or additional litigation by the rightful recipient. Different regions have different laws outlining the consequences of nonpayment.

Alimony Is No Longer Deductible

Alimony is intended to provide “reasonable and necessary” support and is generally awarded in divorces in which one spouse makes substantially more money than the other. The rules governing this included that alimony had to be clearly specified in the divorce agreement, with any payments made either voluntarily or outside the terms of the divorce agreement not considered to be alimony. Additionally, only cash could count as deductible alimony; transfers of property or any other possessions were not included.

Alimony payments used to be reportable as an above-the-line deduction for the payor and as taxable income by the recipient. However, with the passage of the Tax Cuts and Jobs Act, for couples who finalized their divorce and separation after Dec. 31, 2018, or later, those reporting rules were eliminated.

Child Support Is Not Deductible

This form of spousal support is specifically designated to benefit any biological or adopted children of the ex-spouse. It cannot be required to pay for stepchildren unless the ex-spouse adopted the stepchild. It is paid directly to the custodial parent and not to the child. Certain events pertaining to a child—such as their reaching the age of 18 or moving out of the house—may result in a modification or elimination of child support requirements.

Child support is not deductible by the payor or reported as taxable income by the recipient. Both the Internal Revenue Service (IRS) and state governments have the authority to garnish any tax refunds in an effort to collect delinquent child support.

Divisions of property resulting from divorce are generally tax free, as are retirement plan transfers.

Property Settlements and QDROs

Any initial division of property resulting from divorce is usually considered a tax-free exchange of property by the IRS. The recipient takes on the basis of any property received and pays no income tax upon its transfer. Any type of individual retirement account (IRA) or retirement plan transferred from one spouse to another under a qualified domestic relations order (QDRO) is also considered a tax-free exchange of property.

Which Type of Payment Is Better?

From a tax perspective, alimony payments previously favored the payor, while child support payments were more beneficial to the recipient. However, with the new law, neither payment has a tax advantage for the payor.

There are several factors divorcing couples should consider when determining the nature and amount of payments to be made. Who will claim the dependency exemptions and child tax credit for any children involved as dependents is one issue. If one spouse’s income is too high to take advantage of the tax benefits, it may be wise to allow the other spouse to do so, perhaps in return for lower child support payments or other financial arrangements.

A receiving spouse may choose to eschew alimony payments in return for other benefits to be provided by the would-be payor, such as a more favorable custody agreement. The nature of the payment requirements also depends on the overall circumstances of the divorce.

The Bottom Line

Divorcing couples should recognize that it is in both parties’ best interests to know these rules and plan accordingly. Failure to understand the tax implications of spousal payments resulting from divorce can lead to missed credits and deductions, ultimately reducing the income of both parties involved. Couples who are contemplating divorce or who have begun the divorce process may be wise to consult a professional with specialized training in the financial ramifications of divorce, such as a certified divorce specialist