Tax Consequences in a Divorce: Equitable Distribution, Alimony, and Children

Taxes are an inevitable part of life. As such, they should be kept in mind when you are dealing with matters related to divorce. There are various tax consequences that result from claims related to divorce, such as alimony, child support, child custody, and equitable distribution.

Equitable Distribution

When property is divided between you and your spouse after separation, this is considered “incident to divorce” and is not subject to taxes by the IRS according to Section 1041 of the Internal Revenue Code. However, this only applies to transfers of property between you and your spouse. If the property is transferred to a non-spouse, such as a family member, a friend, or some other person, the transfer may be subject to taxation.

Alimony

Unlike child support, alimony is deductible by the payer, and the recipient must include it as income. Alimony is a payment to or for a former spouse that was either ordered by the court or agreed to in a separation agreement or court order. Alimony does not include payments that are voluntary (not ordered by a court or included in a separation agreement).

If you and your spouse do not want the alimony to be treated as income, you may do this by specifically saying in a court order or separation agreement that the payments are not alimony. However, if you are the recipient of the payments, then you will need to attach a copy of the court order or separation agreement to your tax return. You must do this each year that you receive the payments. See Chapter 18 of IRS Publication 17 for more information about alimony.

Children

Child Support: Child support payments are not taxable income for the parent receiving the child support. Likewise, the payments are not deductible for the parent paying the child support.

However, there are other important tax considerations regarding children such as the dependency exemption, and income tax credits for childcare and medical expenses.

Dependency exemption: Parents may agree to allocate the dependency exemption in any way they desire. For example, if there are two children, the parents may agree to each claim one child every year. Or if there is one child, the parents may agree to claim the child alternating years (i.e., mom claims the child in odd years, and dad claims the child in even years). If the parents do not reach an agreement, then the IRS rules apply, in which case the custodial parent is entitled to claim the dependency exemption. The custodial parent is generally the parent with whom the child lived for the greater number of nights during the year. If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income. See IRS Publication 501 for more information about the dependency exemption.

Childcare Credit: The “child and dependent care credit” is available to the custodial parent even if the custodial parent agrees to allow the noncustodial parent to claim the dependency exemption discussed above. The childcare credit may be claimed by the custodial parent (but not the noncustodial parent) if certain requirements set by the IRS are met. For example, the childcare must have been necessary to enable you to work or look for work. There is also a limit on the amount of childcare expenses you may claim. As of 2014, the limit was $3,000 for one child and $6,000 for two or more children. See IRS Publication 503 for more information about the child and dependent care credit.

Medical and Dental Expenses Deduction: The “medical and dental expenses deduction” may be claimed by both the custodial and noncustodial parent so long as certain requirements set by the IRS are met. Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part of the body. Also included are the costs of equipment, supplies, insurance premiums, and transportation to get to the medical care. You may only deduct the amount of medical and dental expenses that exceed 10% of your adjusted gross income (AGI), or 7.5% of your AGI if you were born before January 2, 1950. When calculating the amount of medical and dental expenses to determine if they exceed the relevant percentage of your AGI, you would include both the expenses you paid for yourself and your child. See IRS Publication 502 for more information about medical and dental expenses.

This information is to give you a very general overview of tax consequences related to a divorce, and should not be construed as advice. For advice about your specific case, please contact an experienced family law attorney.

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