Is alimony taxable? What about child support? These are important questions for couples that are divorcing or separating. This page details the tax implications of paying or receiving either payment. Please note, however, that this page is NOT a substitute for speaking with a taxation professional. The information on this page is not meant to be used as tax advice. We are not tax lawyers, so if you’re looking to be advised about your specific situation, talk to a tax professional who can help.
Read on to find out whether alimony or child support is taxable. The following topics are covered on this webpage:
- Is alimony taxable?
- What are the restrictions on deducting taxes for the alimony Payor?
- The Recapture Rule
- What are the restrictions on taxes for the recipient of alimony?
- Is child support taxable?
- Who can claim a child as a dependent?
- The IRS Tie-Breaker Rule for parents who have 50/50 custody
- Work with a tax professional
Is Alimony Taxable?
For tax purposes, the proper term to use is “alimony” although many people may refer to it as spousal support or maintenance payments. The terms will be used interchangeably on this webpage, but remember that it is called “alimony” when filing for taxes.
So is alimony taxable? In a divorce, a property settlement is not deductible nor is it taxable, but alimony is different. There are tax regulations for both alimony payor and the recipient that have to be followed. Federal and state taxes is directly related to the IRS and not defined by the divorce agreement or the court.
Is alimony taxable? Yes, alimony is taxable because it must be included as part of your income. That means, the payor can also deduct the alimony payments on their taxes as well. Unlike other personal deductions, alimony is made as an adjustment to income for both state and federal income tax purposes. Is alimony taxable no matter how much is paid? Yes, no matter the amount agreed on it can be taxed or deducted as long as they follow certain tax rules as listed in the next sections.
What Are the Restrictions on Deducting Taxes for the Alimony Payor?
To qualify for the spousal support deduction:
- The alimony payment must be made in the form of cash, check or money order, and not as property
- The alimony must be paid to the former spouse under a legal divorce or separation agreement
- Alimony payments made on a voluntary basis do not qualify for deduction
- The alimony agreement can’t specifically exclude the payment from being included in the recipient’s income or deducted by the paying spouse
- Liability of the payments must be ended when either spouse dies
In addition to the requirements listed above, there are restrictions involved as well.
- The payor and recipient cannot be living in the same household when the payment is made, after the divorce or separation. Even if you’re sleeping in separate quarters, it will nullify your ability to deduct the alimony payment.
- You and your former spouse are not filing a joint tax return
- The payment must be specifically defined as alimony in the separation or divorce agreement (not referred to something other than alimony or spousal support)
- If the alimony agreement is above the threshold of excess alimony in the first 2-3 years, the IRS may suspect it to be property settlement and require the alimony to be taxed as income
- You may be subject to a $50 penalty and your deduction disallowed if you do not enter your ex-spouse’s (the recipient’s) social security number when filing taxes on Form 1040
- The payments count as alimony payments only after the divorce or separation decree is issued
- The payment must be received by or on behalf of your former spouse. Other recipients may be a school for tuition payments, or a landlord for rental/mortgage, as agreed upon in the divorce/separation agreement
Is alimony taxable? Yes, and because it is, it may be deducted by the spousal support payor. But speak with your tax professional to get expert advice on point. We are not tax attorneys.
The Recapture Rule
For those that deduct their alimony payments, there is one trap that isn’t always understood. It’s called the Recapture Rule and is a tax nightmare. The Recapture Rule may come into play if your alimony payments decrease within the first 3 calendar years. The Recapture Rule is applied when:
- The payment in the 3rd year decreases by more than $15,000 from the 2nd year
- The payment in the 2nd & 3rd year decreases significantly from the amount you paid in the 1st year
For example, if you paid $30,000 in the 1st year, $20,000 in the 2nd year, then $4,000 the 3rd year, you would be subject to the Recapture rule. If this rule applies to your situation, you would have to include in your income the alimony payments you deducted in the previous years. The recipient will be able to deduct the previous payments he/she previously received, in the third year.
Other circumstances that would result in a reduced or ending of alimony payment, requiring the Recapture Rule includes:
- A change in your divorce
- Failure to make alimony payments on time
- Decreased ability to continue providing spousal support
- The recipient spouse has a reduced need for support
When you’re figuring out the decrease in alimony payments for the 3 years, there are specific payments that should be included:
- Alimony payments made under a temporary spousal support order
- Payments ordered over a 3-year period that vary because they are a fixed part of your income from business, property, or from compensation from self-employment
- Payments that are decreased due to the death of either spouse or the remarriage of the recipient spouse
Recapturing can be a complicated process, so it’s best if you work with a tax professional. They can help you properly figure out if this rule applies to you and how much needs to be included as income. This is a complicated process and the IRS tends not to be very understanding of mistakes.
What are the Tax Rules for the Recipient of Alimony?
The qualifying alimony received by one of the spouses is taxable; that means the recipient must pay taxes on it as if it were income earnings. The IRS form 1040 on line 11 provides a space to include the amount of spousal support that you have received in the past tax year. It’s treated the same as your wages or salaries and taxed at somewhere between 10%-30%, depending on what tax bracket the recipient is in. Because the recipient has to pay taxes, he/she should factor this in, at the beginning, when seeking a specific amount in alimony. For example, he or she wants $1000 per month in alimony payments and the tax rate is 25%, the amount asked for should be $1,250 per month to make up for the taxes that will have to be paid.
The alimony payments are made between the ex-spouses, or on behalf of them, so there is no withholding. The best way to make sure you’re not lacking the finances to pay the taxes, you can either have your employer withhold more to account for the alimony taxes or to pay the estimated quarterly taxes. These are not required, but it will help you prepare and avoid a huge tax bill during tax season.
Is Child Support Taxable?
Is alimony taxable? As we seen above, it is. So is child support taxable too? No, child support payments are not-taxable nor is it tax-deductible to the payor of the child support. In other words, the IRS is not interested in legally-mandated child support payments. This tax-free rule only applies to payments that are clearly designated as child support. It can’t be payments for spousal support or even a combination or spousal and child support. This type of payment is considered income-shifting, when made from one parent to another. The federal government considers income-shifting a taxable procedure. On the other hand, child support payments are non-negotiable and cannot be taxed.
There is one important tax-consequence of child support though, the child tax exemption. Either the mother or father is entitled to claiming the child as a dependent, but who gets the exemption is dependent on what the parents agree to or what is ordered by the court.
Who Can Claim a Child as a Dependent?
The IRS says that in order to claim a person as a dependent, you must provide for more than half of the person’s total support in a calendar year. When deciding on a parent to get the exemption, here are a few rules to go by:
- The parents must be divorced or legally separated by a divorce agreement
- Legally separated by a written separation agreement
- Living apart for at least 6 consecutive months in a calendar year
- One or both parents provide more than half of the child’s total support in a calendar year
- Either mother and/or father have custody of the child for more than 6 months in a calendar year
The parent who has custody of the child for the majority of the year will be the custodial parent and will rightfully be able to get the child dependency exemption. Even if the other parent pays more towards the child’s expenses, the custodial parent can claim the child as a dependent. If the non-custodial parent wants to claim the exemption, it must be agreed on by both parents and he/she must meet the following criteria:
- There must be a written agreement signed by the custodial parent saying that he/she will not claim the child as a dependent
- The custodial parent waives the right to claiming the child as a dependent
- A final divorce document that says the non-custodial parent is to claim the child as a dependent, as long as he/she has provided at least $600 to the custodial parent for child support
- The custodial parent has filled out an IRS form 8332 and the non-custodial parent attaches this for to his/her tax return. It is extremely important that the non-custodial parent attaches this form is signed and attached to the tax return or else the IRS may disallow the dependent exemption.
Unfortunately, the IRS won’t allow the child exemption to be split between the parents. The child is considered a dependent of only one parent or the other. Although, it does give room for the parent to negotiate the terms of exemption on a yearly basis or to come up with a long-term plan.
For instance, if one parent has an annual salary of $67,000 and the other parent has an annual salary of $33,000 one parent would be providing 2/3 the support while the other provides 1/3, respectively. The parents can agree to have the first parent, with 2/3 support, get two year’s exemption and the other parent gets the next year’s exemption. Then, it would rotate back to the other parent for another 2 years and so on. Whatever the parents decide on, should be clearly written in the final decree of divorce. The agreement should be agreed on by both parties and reviewed by either a lawyer or a tax professional to ensure that it will cover anything that might come up after the divorce is finalized.
The IRS Tie-Breaker Rule for Parents Who Have 50/50 Custody
For parents who have an equal amount of custody of the child or children, the IRS provides these tiebreaker rules to fairly decide which parent gets to claim the child or children as dependents. That is, if both parents can’t civilly agree to terms of claiming a dependent. The tiebreaker rules are as follows:
- When only one of the two caretakers is the child’s legal parent, then the parent will get to claim the child as a dependent for tax purposes
- When both parents have equal custody of the child and are both eligible to claim the child as a dependent, the parent with greater adjusted income can claim the child as a dependent
- When both caretakers of the child are not the actual parents, the caretaker with the higher adjusted gross income shall be the one to claim the child as a dependent
Work with a Tax Professional
What you’ve learned on this page is not tax advice. We advise you to work with a tax professional to seriously consider the tax implications of your own spousal support or child custody orders. It’s a horrible situation when the IRS comes after you, years later when you thought you’ve done everything correctly. Knowing these things before finalizing your divorce or legal separation can benefit you tremendously. So, once again, is alimony taxable? Yes, alimony is taxable and deductible. Is child support taxable? No, child support is not taxable nor is it deductible.
Footnotes to alimony taxable: