If you’re divorced or getting a divorce, you may be concerned about the tax implications of child support and alimony, whether you are paying or receiving such support. Miller Law Group, P.C. explains how the timing and wording of your divorce can affect the income or deductions you claim on your tax return.
With income tax filing deadlines approaching, many divorced spouses are looking at the tax implications of their finalized agreement for the first time, or they are revisiting a recurring tax issue and wondering if they can benefit from recent changes in legislation. Both the IRS and the State of Massachusetts have strict rules and regulations as to what is taxable income and what is deductible when it comes to people who are divorced.
Child Support, the IRS & Massachusetts’ Income Taxes
Child support is neither deductible by the person who pays nor taxable to the recipient, and this is true for both state and federal taxes. Therefore, child support has no direct tax implications for either parent. The idea is to make sure that this support serves its purpose of providing for a child’s needs.
However, issues related to child support can still affect taxes, such as who can claim the children as dependents on their tax forms. Typically, the IRS will let the parent with primary custody claim them as dependents. In shared custody arrangements, this can usually be done by the parent who has the most overnights.
It also important to note that although a parent who is paying child support cannot deduct the child support payment from their gross income, there may be qualifying tax deductions or exemptions that the paying parent can elect.
These deductions or exemptions that are adjacent to child support can include:
- Head of household
- Child tax credits
- Educations, medical, and other childcare expenses
Be sure to speak with an experienced tax professional to see if certain credits can apply to you.
Furthermore, if a paying parent is behind on child support payments, the amount can be garnished from their tax refunds and passed onto the recipient parent.
Taxes & Alimony in Massachusetts: It’s About Timing
Alimony & the IRS
If you’ve been divorced since before 2019, then you may be used to having to include your alimony payments as income or as a deduction with the IRS. If, however, your alimony order was finalized or modified after January 1, 2019, then alimony doesn’t count towards taxable income or as a deduction in federal taxes.
Alimony & Massachusetts Income Tax
As of January 1, 2022, the same can be said about alimony and Massachusetts’ income taxes. Though Massachusetts caught up with the updates to federal law later, they are now fully aligned with federal guidelines. That means even if your divorce or modification was finalized between January 2019 and 2022, the recipient’s alimony is no longer taxable income, nor can the payer deduct it from their state taxes.
“Unallocated” Support & Taxes
That said, however, unallocated support can provide the payer with tax deductions, while the recipient would pay taxes on the support. In some cases, by lumping both alimony and child support together, the recipient could receive more support overall. In unallocated support, therefore, the amount for child support cannot be less than it would be if it was considered straight child support.
Unallocated alimony and child support can be referred to as “family support” or “spousal support”, which can be taxable and/or deductible. Typical language found in your separation agreement might be “unallocated family support” or “spousal support for the benefit of the wife and the minor children.”
For the unallocated support payment to be deductible and taxable, the payment must not be specified as child support. Typically, family support and spousal support are set for a fixed duration upon the receiving spouse’s death, remarriage, or retirement. A support obligation that is fixed upon the child, such as the child reaching emancipation, is generally viewed by the IRS as child support.
Why Is the Designation of Unallocated Support Important?
If implemented correctly, an unallocated support payment can allow the parties to benefit from a higher net transfer of funds to the receiving spouse. This works because the person paying the support is generally in a higher tax bracket and can afford a larger support payment because they will receive a tax deduction for the support payment.
The benefit of designating support payments as unallocated is that it gives the parties freedom to decide for themselves how the support is to be paid, while also giving either or both parties possible tax benefits.
If you would like more information on the tax implications of spousal and child support, or if you have other questions about divorce, contact any of our experienced alimony and child support lawyers at Miller Law Group, P.C.: (888) 874-2142.