Everyone knows divorce can be sticky emotionally, but the economics of divorce can get tricky too, especially when checks are still being written to an ex-spouse after a divorce is final. Depending on how the money is allocated, there are different tax implications for both the recipient and the payer.
As part of a divorce settlement, a family law court may ask one of the spouses to pay spousal support (aka alimony), child support, or both.
When child support is paid, the taxes on that money are paid by the person that pays the money. It’s treated largely like any other bill. You don’t get a tax break for making payments on your living room furniture. The recipient does not have to claim the money as income, so it means that the recipient and his or her children can maintain a higher standard of living without being bumped into a higher tax bracket.
Spousal support works in the opposite way. It may be ruled that one spouse continue to provide for an ex-spouse after a marriage is over whether or not the couple had children. When this happens the person paying the support gets a tax break, and the person receiving the support must claim alimony payments as income. Depending on that person’s personal income from wages or other sources, this may affect their tax bracket and cause them to pay higher taxes on all their income.
While money matters may seem trivial at the time compared to issues such as child custody, it’s important for both parties to look at their future financial connections with a level head and an open mind in order to find the best solution for everyone. Also, it’s crucial to work with a divorce attorney and financial professionals who thoroughly understand that tax implications of divorce.
The Huffington Post: “5 Money Questions To Ask Before The Year And Your Marriage Come To A Close,” Gabrielle Clemens, Dec. 27, 2011