For most of us, taxes are generally unavoidable. Many events in life impact what taxes we pay, and divorce is one of them. In fact, there are various issues in a divorce case with potential tax implications. Today, we’ll focus on one of the main categories: support, meaning child support and alimony.
Just as people in general benefit from tax planning, people who don’t consider tax implications when resolving their divorce are more likely to pay higher taxes. The best practice is to have a solid understanding of the taxes associated with the various elements of a divorce prior to settling in a divorce case.
Overview of Divorce Issues Impacting Tax Liability
Tax issues fall into three main categories in a divorce. The first is the issue of support, including alimony and child support, which we’ll cover more below. The second relates to property transfers, which ordinarily occur through equitable distribution. The third issue includes the various filing statuses, credits, and exemptions that one or both parties may claim when filing their taxes.
Support Taxation: Alimony and Child Support.
Alimony and child support are two types of support that one former spouse may pay to the other. Logically, child support is only available when there are dependent children. Conceptually, child support is actually paid by both parents for the benefit of the children, with one party paying some support through the other parent so that the children’s needs are comparably met in each household. Consider that child support is the money used to pay the expenses of the children. You pay much of these expenses yourself when the children are with you. But, when we discuss child support, we are usually referring to the portion that’s paid by one parent to the other. Because child support is viewed as a benefit to the children and not to the parents, child support is post-tax money. This means there is no income tax deduction for paying child support, and the parent who receives the support does not consider it income for income tax purposes.
Alimony, on the other hand, is for a different purpose altogether. The purpose of alimony is for one former spouse to pay to the other money on an ongoing basis, so that the spouse receiving the support may live a lifestyle comparable to that which was enjoyed during the marriage. The idea is that both parties can live a lifestyle comparable to that which was enjoyed during the marriage, because the former spouse paying the alimony still has the ability to pay the support without sacrificing his or her lifestyle.
Because alimony is viewed more as an augmentation to income, the person paying alimony may deduct it from his or her income tax, and the person receiving alimony will treat it as ordinary income for tax purposes. There is ordinarily a net tax benefit when alimony is paid in a case, because the party paying the alimony is typically in a higher tax bracket than the party receiving alimony. Accordingly, between the two former spouses, there is ordinarily less tax paid overall.
Now, in many cases, particularly on a temporary basis, an award of support may be “unallocated”. That is, there may be one total support order, obligating one spouse to pay unallocated, sometimes called undifferentiated, support. In those orders, it may not be clear which portion of the support order accounts for child support and which portion of the order accounts for alimony. Is in on allocated support order deductible like alimony or is it after-tax dollars as is the case with child support? The answer is that when there is an unallocated award of support, the entire amount maybe deductible to the party paying it and taxable to the recipient. However, if the portion that accounts for child support or alimony can be identified and separated out, the different tax treatment should be applied to each portion.
Clearly the tax implications of a support order, or in a case generally, are relevant and important to settlement. A party doing the math to determine if he or she will be able to survive with a proposed support figure can’t accurately come to a conclusion without considering the resulting income taxes. Accordingly, it’s really crucial to do the math and even better to have a divorce lawyer who understands how this works and can do the calculations. The first step in any such analysis is to schedule an attorney consultation. To schedule your free attorney consultation, call our office today at 978-225-9030 during regular business hours or complete a contact form here and we’ll reach out to you at our first opportunity.