How are alimony and child support payments taxed?

Child support payments are neither deductible nor income to the recipient.

Before the 2017 Tax Cuts and Jobs Act, alimony (spousal support) payments were usually structured by the parties to produce either of two tax results:

(1) deductible by the payer ex-spouse and gross income to the recipient ex-spouse, or

(2) not deductible by the payer and not taxable income to the recipient (tax neutral).

The above treatment continues to be applied for divorce or settlement agreements finalized before 2019.  However, for new divorce agreements signed beginning on January 1, 2019, the law changes: (1) the deduction for alimony (spousal support) payments is abolished, and (2) the recipient no longer has to include those payments in taxable income.

Pre-2019 Agreements

The 2017 Tax Cuts and Jobs Act fundamentally changed the tax treatment of alimony payments, beginning in 2019.  The following is an explanation of the rules in effect until the end of 2018.

In settling a divorce, the parties frequently plan on whichever tax result works out best. If the payments are not structured to comply with the rules, the general rule is that alimony payments are income to the recipient and deductible by the payer.

Frequently, divorcing couples agree upon a fixed aggregate payment from one spouse to the other. Even if the recipient spouse dies before the payments are due, this sum will be payable, and it will be treated as a property settlement. A property settlement is not deductible by the transferor and is not income to the transferee. Even if the payments are properly structured, the Internal Revenue Code prevents deduction of “front-loaded” payments.

The tax consequences of payments to be made because of the dissolution of a marriage are complicated, and divorcing couples would be well advised to take them into account in agreeing on the economic issues involved in divorce.

Case Studies: Alimony and Child Support Taxation

Case Studies: Alimony and Child Support Taxation

Case Study 1: The Impact of Tax Reform on Alimony Payments

John and Lisa finalized their divorce in 2018, before the implementation of tax reform. As part of their settlement agreement, John agreed to pay Lisa $2,000 per month in alimony.

According to the previous tax rules, John could deduct the alimony payments from his taxable income, while Lisa had to include them as taxable income.

However, with the changes introduced by the Tax Cuts and Jobs Act in 2019, the tax treatment of alimony payments was modified. The new law abolished the alimony deduction for payers like John and made the payments tax-neutral for recipients like Lisa.

As a result, John can no longer deduct the alimony payments from his taxable income, and Lisa no longer includes them in her taxable income. This change in tax law had a significant impact on both parties’ finances, and they had to adjust their financial planning accordingly.

Case Study 2: Structuring Alimony Payments for Tax Efficiency

Sarah and Michael are going through a divorce and are currently negotiating their alimony agreement. Both parties are concerned about the tax implications and want to structure the payments in the most tax-efficient manner.

After consulting with their attorneys and tax advisors, Sarah and Michael decide to opt for a tax-neutral approach. They agree that Michael will make monthly alimony payments to Sarah, but they will not be tax-deductible for Michael, nor will they be included as taxable income for Sarah.

This arrangement ensures that the alimony payments do not create additional tax burdens for either party. By carefully structuring their alimony agreement, Sarah and Michael can minimize the tax impact and optimize their financial situations post-divorce.

Case Study 3: Tax Considerations in Child Support Payments

Jennifer and David are divorced parents sharing custody of their two children. They are aware that child support payments are neither deductible for the payer nor considered taxable income for the recipient.

To ensure clarity and avoid potential tax issues, Jennifer and David work with their respective attorneys to clearly outline the child support payments in their divorce agreement. They understand that the payments are solely for the support of their children and do not have any tax implications.

By addressing the tax considerations related to child support payments upfront, Jennifer and David can focus on providing financial stability for their children without additional tax complications.