Unlike alimony, a spouse who pays child support cannot deduct it at tax time. That’s because all of us have a legal obligation to support our children, no matter where they live. Because alimony is deductible but child support is not, you and your ex-spouse may wish to consider how to allocate your settlement between these two payments. Of course, it may be tempting to disguise your child support payment as alimony so that you can deduct it. Don’t try this, because the IRS already has your number. An alleged alimony payment will be treated as child support if it is reduced or eliminated by something related to your child. For instance, the IRS will treat an alimony payment that ends when a child marries or turns 18 as a non-deductible child support payment.
However, if both spouses agree that a payment will be alimony, and the payment is not tied to life events of the child, the IRS will treat it as alimony even if it's clear that the receiving spouse would not have enough money to otherwise support the child. In that sense, spouses who trust one another can legally collude for tax purposes.
On the other hand, you might want to structure your payment as child support rather than alimony. If you and your spouse have roughly equal incomes, deducting alimony won’t provide the two of you with an overall tax savings. The spouse who receives payments will not want to include them as income, because doing so will result in higher taxes. As a consequence, the paying spouse will not be able to take a deduction for alimony, and so may wish to place restrictions on the payments to ensure they'll be designated for the children. These restrictions will turn the payments into child support.
Whether you structure your payments as child support or alimony usually will depend on non-tax considerations. For instance, you may want to signal emotional support for your children by specially designating payments for them. Or perhaps you simply don’t trust your spouse, and you want to restrict her ability to use the payments. Worse yet, perhaps the court doesn’t trust you or your spouse, so it orders child support payments instead of alimony. But if none of these considerations are present, you and your spouse might want to consider whether alimony payments would make more tax sense. If you save money as a divorced couple, everyone can do better in a bad situation, including your children.
And What About the Child Exemption?
If you and your spouse have children, as a married couple you claimed a $3,500 personal exemption for each of them. Deciding who can claim the exemption in a divorce can be a tricky business. Usually, the parent who has custody of a child for more than half of the year is also the parent who claims the exemption; however, this is not universally true. In some cases, the non-custodial parent can claim the exemption instead. This happens when the custodial parent gives up her right to the exemption by giving her former spouse a written, signed statement that she will not claim the exemption on her own tax return.
A custodial parent can release the right to the exemption for one year, for specified years, or for all years. For example, if a father has custody of his children, he can agree to give up the exemption every year, every second year, for a period of three years, or only in years when the Cavs make the payoffs. (You get the picture.)
Like the deduction for alimony, allocation of a child’s exemption should be done in light of each spouse’s income. If one spouse is in a higher tax bracket than the other, the exemption will be more valuable to the high-earning spouse, and allocating the exemption to that spouse will produce a net benefit that everyone can share.
Be sure to check out the complete archive of Daily Deductions.
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