Many spouses have questions about how child support and alimony might impact their taxes after a divorce. While many of these questions are relatively easy to answer, a few surprisingly complex issues may arise. Aside from child support and alimony, there are many other factors that might affect a spouse’s tax considerations during a divorce. The most notable of these is probably the division of property. In fact, property division can become such a major focus that other potential factors slip under the radar.
The Tax Implications of Child Support
The IRS is quite clear when it comes to child support. On the one hand, spouses who receive child support payments never have to declare these funds as income. Spouses should not be concerned about paying tax bills for child support. On the other end of the spectrum, child support payments are not deductible for the payer. In other words, child support has virtually zero impact on either spouse in terms of tax considerations, and the general arrangement clearly favors the receiving spouse.
The only time when child support might affect taxes is if spouses fail to make their payments on time. If this occurs, then a spouse’s state and federal tax refund might be intercepted in order to ensure the custodial parent is receiving the necessary amount of child support.
The Tax Implications of Alimony
Alimony is handled slightly differently. Otherwise known as spousal support, alimony can indeed have an impact on a spouse’s tax situation in certain situations. The IRS states that if the divorce occurred before 2019, alimony payments are deductible by the payer and taxable to the recipient. This is essentially the exact opposite of how child support payments are handled. Spouses are instructed to include their alimony payments as income when filing a tax return.
However, new developments in the legal world have changed these rules. Under the new rules, alimony is not tax-deductible for paying spouses. In addition, it is not considered taxable income. Once again, these rules clearly favor the receiving spouse.
Alimony and IRAs
The recent changes also affect IRAs. When spouses withdraw funds from an individual retirement account in order to pay alimony, these funds are not taxable upon withdrawal. In addition, the spouse who then receives these funds as alimony payments will be required to pay taxes on them. In addition, those who receive alimony payments cannot invest those funds into IRAs. This means that alimony recipients may find it more challenging to plan for their retirement and save for the future.
Legal Fees are Not Tax-Deductible
To make matters even more restricting, spouses cannot deduct legal fees they might incur while dealing with divorce-related issues. This means that if a spouse wants to fight some aspect of their court-ordered alimony or child support payments, they will face even more taxable offenses. So if you are not satisfied with how these new changes have affected you, you may actually end up creating more taxes for yourself if you try to fight them in court.