Divorce and the Tax Consequences of Payments | Tax Tip of the Week | No. 98

Understanding Applicable Tax Laws

Determining the tax consequences that can arise during a divorce or marital separation can be vital for the financial protection and well being of you and your family. That’s why it’s important to understand applicable tax laws before making any major decisions.Often most confusing during the divorce process is determining whether a payment should be considered alimony or child support. Generally, alimony is the amount paid to a spouse for his or her living expenses, education, health or life insurance, property taxes, or mortgage payment. Alimony is not for providing child support. The person receiving alimony must pay taxes on the alimony in the year it is received, and the paying spouse may deduct the amount in the year it is paid, provided the alimony meets all of the following conditions:• The payment is made in a cash form, which includes checks, bank deposits, etc. Payments in the form of such things as bonds, stocks, money market shares, or actual objects are not considered alimony for tax purposes.• The payment is made as the result of a legal separation agreement or divorce decree.• The spouses do not live in the same household at the time the payment is made.• The divorce decree does not designate the payment as nontaxable to either party.• There can be no liability for payments after the death of the receiving spouse.Child support, unlike alimony, is not taxable to the spouse who received the payment, nor is it tax deductible by the spouse who makes the payment. A divorce decree may specifically call the payment “alimony,” but the payment may have the “characteristics” of child support. One characteristic of a child support payment might be the designation in the divorce document that the payment be terminated if the child’s situation changes.Tax challenges during and following a divorce are common, but they can be minimized with some knowledge about tax laws and IRS procedures. Financial planning is an important part of the divorce process. This tax tip contains general tax information only.  Each tax situation may be different, do not rely upon this information as your sole source of authority.As always……give us a call BEFORE you do something-not after!

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