The growing divorce rate in America has led to the creation of various types of spousal support where 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 being tax deductible. But under the Tax Cuts and Jobs Act, that is no longer the case.
This article explores the factors that determine how spousal support is classified and subsequently taxed.
- 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, alimony is no longer deductible.
- Child support payments have never been tax deductible and remain not available 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 of them 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
This type of spousal support is often awarded in divorces where children are not involved. Prior to the passing of the Tax Cuts and Jobs Act, alimony payments were reportable as an above-the-line deduction, deductible by the payor and reportable as taxable income by the recipient.
The rules surrounding this included that alimony had to be clearly specified in the divorce, had to be mandatory and payments made either voluntarily or outside the terms of the divorce agreement couldn't count as alimony. Additionally, only cash could count as deductible alimony, no transfer of property or any other possessions.
However, with the passage of the Tax Cuts and Jobs Act, alimony is no longer available as a deduction. Couples who finalized their divorce and seperation no later than December 31, 2018, were able to take the deduction when filing their 2018 taxes.
Alimony was previously tax deductible but is not any longer, following the passage of the Tax Cuts and Jobs Act.
Child Support Is Not Deductible
This form of spousal support is specifically designated to benefit any children of the ex-spouse. Child support is not deductible by the payor or reported as taxable income by the recipient. Certain events pertaining to the children, such as their reaching the age of majority or moving out of the house, result in a modification to child support requirements. Both the IRS and state governments have the authority to garnish any tax refunds in an effort to collect delinquent child support.
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 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.
If the receiving spouse's income is fairly low, receiving alimony payments may have little or no impact upon his or her income, and therefore may be elected in return for other benefits to be provided by the 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 it is in both parties' best interests to know these rules and plan accordingly. Failure to understand the tax implications 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.