There are a number of ways that taxes are affected when couples divorce. Alimony, also called spousal support or separate maintenance, affects both parties’ income taxes. The spouse who pays alimony usually deducts it from his or her taxable income when filing tax returns, thereby reducing both state and federal income taxes. The party who receives alimony will claim it on tax returns, thereby adding to his or her state and federal income taxes. To qualify for alimony, the payment must be a “cash” payment (not goods or services), it must be payable from one spouse or former spouse to the other, pursuant to a written agreement, the parties cannot be members of the same household when the payments are made, the parties must file separate tax returns for the year in which alimony is claimed, and all payments must end on the death of the recipient.
Although child support is not similarly deductible or taxable, divorce can affect income taxes when designating the parent who will claim one or more children as dependent deductions each year. These deductions generally lower a parent’s income taxes. In addition, childcare tax credits may be available to the parent who claims a dependent child, further reducing that parent’s income tax liability. In some cases, there may be tax consequences for selling assets and distributing losses.
Clients are urged to consult with their independent tax advisors to fully understand the tax impact of their divorce settlements.
Amy Wechsler is a Certified Matrimonial Law Attorney in Warren, New Jersey and a partner with the law firm of Shimalla, Wechsler, Lepp & D’Onofrio, LLP.