Tax Deductions for Divorcing Couples

Separated taxpayers may not claim the alimony deduction unless they are living apart.

When spouses divorce, financial concerns become an overriding consideration. Contentious divorces usually require obtaining legal representation to determine the financial implications of divorce. Divorce lawyers typically receive tax law training to help their clients understand what settlement terms are most favorable and have the best long-term tax consequences. The federal tax laws provide divorcing couples with special tax rules.

Alimony

Alimony or spousal support is a cash or property payment by one spouse to the other spouse. Spouses can agree upon alimony payments through a written settlement agreement or a court may order the alimony award. Since alimony is deductible to the taxpayer paying alimony, tax attorneys can help structure a settlement with favorable terms to their clients. The Internal Revenue Service taxes alimony to the taxpayer receiving alimony as ordinary income. Spouses paying alimony can deduct their monthly spousal support payments on their tax returns.

Child Support

Most states use presumptive child support guidelines to determine the amount of child support that noncustodial parents must pay the custodial parents. The Internal Revenue Service does not provide a deduction to taxpayers who pay child support. However, the federal tax code does not include child support payments as income to the custodial parent. Custodial parents receiving child support do not have to report their monthly child support payments on their tax returns. The IRS provides tax-free treatment only to parents who have a valid settlement agreement or written court order providing the support award. The agreement or order must contain language that the support is for "child support," not "family support." Since family support includes spousal support, the IRS is careful about ensuring that spouses pay tax on their alimony payments.

Deductions for Children

If the divorcing taxpayers have children, then the IRS only allows one parent to claim the child as an exemption on his federal tax return. Generally, the IRS allows the custodial parent to claim the child as an exemption or dependent child unless parents have shared physical custody. In this case, the IRS uses special tax rules, and taxpayers with greater incomes may take the dependent child deduction.

Awards or Agreements

Some parents can decide between them who takes the dependent deduction. When parents cannot agree, a court may order the parents to split them if there is more than one child or require them to alternate years taking the deduction. Furthermore, some courts may simply allow the taxpayer paying alimony to take the deduction. If the custodial parent cannot take the deduction, then the IRS requires the taxpayer to submit the court order and Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or submit a similar declaration.

Considerations

Since tax laws can frequently change, you should not use this information as a substitute for legal or tax advice. Seek advice through a certified accountant or tax attorney licensed to practice law in your jurisdiction.

References

• Divorce Source: Taxes and Divorce
• IRS.gov: Publication 504, Divorced or Separated Individuals (2009)

Resources

• IRS.gov: Form 8332 -- Release/Revocation of Claim to Exemption for Child by Custodial Parent