It is important to consider the tax implications of your divorce so that you do not receive a surprise at tax time. Money that changes hands from one spouse to the other in a divorce may be taxable, and if you sell any of your joint property at a gain, that income may also be taxable. This post will focus on the income tax implications of paying and receiving Child Support, Spousal Maintenance, and “Unallocated” Support.
The most common tax issue you may encounter involves cash payments made between spouses going through a divorce. Whether you will have to pay tax for receiving money depends on whether that money is intended for Child Support, or whether it was intended to be Spousal Maintenance (formerly known as alimony.) A simple rule of thumb is that Child Support is not taxable. The person receiving it pays no tax on that money, and the person paying it may not deduct it from his personal income tax. Spousal Maintenance is treated differently. The party receiving Spousal Maintenance is obligated to pay income tax on that money at his or her tax bracket, while the party paying Spousal Maintenance is entitled to a deduction from his personal income taxes.
Finally, be aware of “Unallocated” Support. Sometimes, when one spouse in a divorce is going to pay both Child Support and Spousal Maintenance, the parties will agree to combine the two into Unallocated Support. The entire Unallocated Support amount will be taxable to the spouse receiving payment, and tax deductible to the spouse making payment. There may be good reasons for agreeing to Unallocated Support, including a large income disparity between the two parties to the divorce, but beware that if you receive Unallocated Support, you will pay tax for the full support amount that you receive.
It is important to consider the tax implications of your divorce settlement before entering it. The Law Offices of Van A. Schwab is an experienced family law firm with decades of experience and we can help you plan beyond the date of your divorce. Call now to schedule a consultation with one of our attorneys.