One of the most common misunderstandings in divorce negotiations is the tax implications each agreement carries. The ultimate value of the financial agreement you reach varies greatly depending on taxes, which is why it is important to understand the value of your agreement after taxes.
Child support is typically defined as a court ordered payment from on parent to another in order to support your mutual children. Although it is a common misconception, child support is not taxed. The parent paying child support cannot deduct the child support amount from their taxes. Additionally, child support is not taxed as income for the parent receiving support.
Alimony or Spousal Maintenance
Alimony (also known as spousal maintenance or child support) is a court ordered payment from one former spouse to another as a form of financial assistance for a period of time following a divorce. The taxability of this support depends on when your divorce was finalized.
Pre-December 31, 2018
If your divorce was finalized on December 31, 2018 or before, spousal support payments will be tax deductible to the spouse making support payments and taxed as income for the spouse receiving support payments, unless otherwise mutually agreed per your court order.
This taxability is grandfathered in regardless of the length of support.
If spousal support is modified (changed) per a court order after December 31, 2018, the taxability of support may change to Post-December 31, 2018 support (see below).
Post-December 31, 2018
If your divorce was finalized after December 31, 2018, spousal support payments are not tax deductible or taxed as income, per the Federal Tax Law passed in 2017.
Why Does Taxability of Support Matter?
When we discuss financial agreements during divorce, we always want to consider long-term finances, such as assets or debts you retain that can be used throughout your life, as well as short-term finances, like your monthly ability to pay for day-to-day expenses. Support directly impacts your ability to pay your daily expenses, as it typically is needed in addition to your income to support your daily life. For this reason, it is particularly important that you understand what percentage of support is useable for expenses, while a portion may need to be paid in taxes. if you have any specific tax concerns or questions, please refer to a tax advisor.