One of the many things a co-parent needs to wrap their head around when stepping through a divorce are the tax implications of their divorce agreement. Unfortunately, there are many different co-parenting myths which can make the process even more confusing than it already is.
Co-parenting myths about divorce and taxes – and what you need to know about the reality.
We had a chance to connect with Stephanie Maloney of Peace Talks Mediation Service. She’s a Certified Financial Planner® (CFP®), Certified Divorce Financial Analyst® (CDFA®), and was one of the first practicing divorce financial planners in the Los Angeles area. As a veteran mediator with Peace Talks, she brings her expertise to help mediation clients make good choices for the short-term and long-term financial impact of proposed divorce settlements, offer valuable insight into the pros and cons of different settlement proposals and help avoid common financial pitfalls of divorce.
One of the many things a co-parent needs to wrap their head around when going through a divorce are the tax implications of their divorce agreement. We understand it is a time of turmoil and emotions running high but there are potentially big implications on the other side of the divorce settlement that both of you are going to be responsible for years to come.
Property and asset division, custody arrangements, and child support and alimony agreements are all divorce-related matters that can carry significant tax implications. You must also consider how divorce will affect your individual income tax return since your filing status and exemption planning will most likely change.
Spousal support is something to be negotiated but a driving factor in most states is the length of your marriage. Couples married less than 5 years, less than 10 years, and more than 10 years are all benchmarks that may trigger different amounts or the length of time to make/receive payments.
Co-Parenting Myth #1: Child Support and Spousal Support (Alimony) Amounts
One of the most common co-parenting myths is that the child support and spousal support determined at the time of your divorce decree is the one you will live with until the end of its term. This is simply not true. Things change. People get raises, they get laid off, they become sick. Life happens. When life happens, either co-parent can file for an adjustment to the divorce agreement, better known as the modification stipulation.
The new terms can be worked out through a number of ways. You can file the paperwork through the Self Help process (you may or may not need to open a new case) or it can be addressed through mediation. In most, if not all cases this will involve opening a new case number and separate filing, and the agreed modification will be filed with the local court.
Co-Parenting Myth #2: Child Support and Alimony Payments are Tax Deductible for the Payer
For child support, the answer is ‘no’, it is not a taxable deduction for the paying co-parent nor is it taxable income for the co-parent receiving it.
For spousal support, things have changed recently: for divorce agreements happening after December 31st, 2018, spousal support or alimony is no longer a tax-deductible expense and is no longer considered taxable income to the person receiving it. For those of you with a divorce agreement dated before December 31, 2018, spousal support payments are still tax-deductible for the payor and taxable income for the recipient – however, you could lose the benefit upon modifying the agreement.
Co-Parenting Myth #3: Single Moms Usually Become Head of Household Post-divorce
Regarding the tax implication, the assumption here is the mom will have more than 50% custody on the co-parenting schedule, thus the kids will reside at her address and she will become head of household. During the divorce, it may be hotly contested, but through mediation, the issue is usually resolved easily.
Running different scenarios, both with either spouse taking the deduction(s), or splitting the deduction(s). The reports will show where the greatest tax savings lie. If possible, both spouses will realize tax savings from claiming the children understanding they do not want this deduction to result in a wasted tax benefit to anyone.
- If you and your spouse will both receive a tax benefit from claiming one or more children (and are also not phased out of the child tax credit due to high income), you may decide to split the exemptions for the children.
- If you have an odd number of children, you could consider splitting the exemption for the even numbered children and then alternate the exemption for the remaining child from year to year. (IE. Mother gets even years, Father gets odd years)
- In the case of one child, you may want to alternate the child from year to year.
- A spouse with primary custody of the children is entitled by law to claim all of the children in his/her custody. However, there is the chance of this deduction getting wasted on the primary custodian if they have little or no income resulting in any tax liability. The recurring theme here is: what is the long-term benefit?
If you are the primary custodian, you could negotiate with your spouse to relinquish the claim to them if they will realize a tax benefit. More cash in your spouse’s pocket means more cash available to pay child support.
On the other hand, If you are receiving alimony payments which are taxable income, you might need the dependency claim to offset the taxes paid on the alimony, but the main point here is not to assume it is set in stone and consider all the options.
Regardless of the co-parenting myths or issues at hand, keep in mind that the court and the mediation process is working to create a fair and balanced settlement that is ultimately providing the best situation for the kids and is fair to the couple based on the information provided. As you can see there are plenty of variables to work through, so the best thing to do is ask questions, do your homework and be aware of implications both at the federal and state level.
Judge Sherrill A. Ellsworth (RET) is the co-founder of coParenter and Past Presiding Judge of Riverside County. After 20 years on the bench and 10 in a Family Law Department, Judge Ellsworth saw the potential of CourtTech to fill a void and retired from the bench to focus on having a greater impact on today’s families by making our courts more accessible, effective, and efficient. www.coparenter.com