Posts Tagged ‘alimony’
by Tom Hogan
As the time advances toward Tax Day, one of the first questions divorced parents ask is, “Can I claim my child support as a deduction?” Afterall, after spending considerable amounts for the care of children, there has to be some way to get a tax break. Unfortunately, that break won’t come through a deduction of child support. Why?
The IRS does not consider child support to be tax deductible. Child support also is not taxable income and does not have a line item under itemized expenses. However, alimony or spousal support is considered taxable income and expenses related to the collection of those payments are tax deductible.
For the person paying child support and alimony, the IRS does allow tax deduction to be taken for those whose divorce decree wraps those two payments up into “family support” or for those who remit the child support as alimony. The recipient, however, must report this as taxable income. As a word of caution, if alimony is scheduled to end within six months of the child’s 18th or 21st birth date, the IRS may suspect the alimony is disguised child support.
All is not lost. While child support is not taxable income or deductible, being able to claim a child as a dependant does impact tax liability. Only one parent can take the dependency exemption and file as “head of household”. A divorce decree or IRS determination will establish who can take this exemption and get the subsequent benefits.
There are other expenses related to the care of children that do also allow for a tax break. Custodial parents may be able to take child care credits. For parents who have a dependent under the age of 17 and incur work-related expenses, the tax credit can apply to a portion of these costs. Noncustodial parents have the benefit of deducting certain child care and medical fees for minor children. Although the Tuition and Fees deduction has been eliminated for older children, parents of undergraduate students can take the American Opportunity Credit for up to $2,500 for each eligible child.
There are negative tax implications if a person does not pay their child support. If a person fails to pay child support, they may lose their tax refund. The Bureau of Fiscal Services can withhold a portion or all of a tax refund in an effort to collect delinquent child support payments. This is done exclusively under the Treasury Offset Program and if this is to occur, the BFS will provide details on the original refund amount, the amount withheld and information about the agency collecting the payment. If a couple filed jointly but were impacted by BFS action to recover unpaid child support, they may file Form 8379 to request a portion of the withheld payment back from the IRS.
Whereas child support is not able to be claimed as a deduction, there are ways to get tax credits or benefits to offset the costs of caring for dependent children. Whether through a family support agreement, dependent exemptions, or claiming deductions and tax credits on child care, education or medical expenses, divorced parents can benefit from available provisions to tax relief.
To speak with our attorneys, who specialize in both tax and divorce, please call our Modesto office at (209) 492-9335.
by Tom Hogan
Tax time is filled with W-2’s, receipts, and calculators, and with taxpayers working feverishly to report income, pay required taxes, and claim their maximum deductions by the deadline. This time of the year is improved if there are tax breaks or a large refund on the way. For those who went through a divorce in the previous tax year, there are some things that can be added as deductions and beneficial to both spouses. Let’s dig into alimony and see how this affects divorced ones at tax time.
For the payee
Although divorce carries fees for court filings, attorneys or other counsel, those typically are not tax deductible. However, under some circumstances, a spouse can deduct fees associated with the collection of alimony fees. The person seeking alimony payments–either wives or husbands–can deduct fees that were incurred during the process of trying to obtain payments from their spouse. These fees will be filed on tax Form 1040 Schedule A as a “Miscellaneous Deduction”.
Alimony payments are considered taxable “earned income” for the payee. This comes with some restrictions. For example, the itemized deductions has to be at least two percent of the adjusted gross income for the spouse that is seeking alimony payments from their ex. If they do not itemize deductions or the deductions do not meet the required percentage, the spouse is unable to take claim it.
The kinds of fees that are able to be deducted include those for tax advice, the costs for legal services to receive spousal support, and fees for securing interests in a retirement plan. Also, since some counseling is not considered deductible, if an attorney provides these non-deductible services, these must be billed separately from other services that are deductible. Additionally, if alimony payments are in the first year or two after the divorce, these may be considered a non-deductible property settlement.
For the payer
The person paying alimony may claim it as an “above-the-line” tax deduction if they meet IRS eligibility. Some prefer this over paying property settlements because of its tax benefits. The payments must be made under a legal separation agreement or divorce decree, not voluntary or made by persons living in the same household. The payments are not considered child support, the payments must be made by cash, check or money order and these payments cease after the payers death. These payments should be reported on Line31a of the payers Form 1040 along with their spouse’s social security number so as to not have this deduction cancelled and penalized.
Some have paid child support payments as alimony in order to save on taxes. While this is allowable by the IRS, if it resembles child support, it may not be entirely deductible. Especially if alimony is scheduled to end by within six months of the children’s 18th or 21st birthday will payments be suspicious and disguised child support. The IRS also becomes suspicious if alimony payments are below the threshold of excess alimony within the first two to three years of the divorce.
Alimony payments have benefits both to the one receiving spousal support and the one paying it. To get tax deductible help with alimony and tax planning, contact our offices.