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Tax Implications of Divorce

A divorce, annulment or legal separation is undoubtedly one of life’s biggest heartaches. To make matters worse, it can complicate your tax return too. The more familiar you are with the terms of your agreement, the better you'll understand the tax implications.

Photo: Shutterstock / The Nest

Is Alimony Tax Deductible?

Alimony -- also known as spousal support -- is deductible by the payer, and it’s taxable income to the payee. Both the payer and payee should have alimony payments clearly defined in the divorce agreement.

A payment to a spouse under a divorce or separation agreement that was executed after 1984 is treated as alimony if it meets these requirements:

  • The payment is in cash
  • The agreement doesn’t designate the payment as not alimony
  • The spouses don't file a joint return
  • The spouses aren’t members of the same household at the time the payments are made.

This requirement applies only if the spouses are divorced or legally separated under a decree of divorce or separate maintenance. The payments might be alimony even if the parties reside in the same residence if both of these apply:

  • The parties aren’t legally separated
  • The payments are made under a written separation agreement or temporary support order
  • There’s no liability to make any payment -- in cash or property -- after the death of either spouse
  • The payment isn’t treated as child support

Is Child Support Tax Deductible?

As opposed to alimony, child support isn’t deductible by the payer, and it doesn’t count as income to the payee. A parent’s decision to claim a child as a tax exemption depends on both parents’ custodial or noncustodial status. The custodial parent is usually the parent the child lives with for a greater number of nights during the tax year. The other parent is the noncustodial parent.

If you're the custodial parent, you can claim the child as a dependent. However, the noncustodial parent can claim the dependent exemption instead -- and the child tax credit, if applicable -- with the consent of the custodial parent. The custodial parent must file Form 8332 to release the child to the noncustodial parent for those tax benefits.

The custodial parent might still qualify as head of household and might be eligible for these tax benefits for that child:

  • Earned income credit (EIC)
  • Child and dependent care credit
  • Exclusion for child care benefits

But if the custodial parent releases the dependency exemption, that parent also releases the right for the noncustodial parent to claim the child tax credit and/or additional child tax credit.
The noncustodial parent can never claim:

  • Head of household filing status
  • EIC
  • Child and dependent care credit
  • Exclusion for child care benefits

This applies even if the custodial parent releases the dependency exemption. Even if custody is spelled out clearly in the decree, a legal decree usually can’t trump the tax law definition of custodial parent. If there's any confusion, the IRS might disallow the claiming rights of either parent.

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