- Alimony is both deductible by the payer and taxable to the recipient.
- Child support isn’t deductible by the payer, and isn’t taxed to the recipient.
- To file as Head of Household after a divorce, several requirements must be met.
- Divorce may affect your IRAs and employer-provided retirement plans.
A divorce, annulment or legal separation can complicate your tax return. Take an active role in how your divorce decree is written, and understand the terms in it. The more familiar you are with the terms and agreement, the better you’ll understand the tax implications.
Alimony is deductible by the payer and considered taxable income to the payee. It’s important for both the payer and recipient to have alimony payments clearly defined in the divorce agreement. The payer of alimony doesn’t have to itemize to deduct it. It’s an “above the line” deduction. If you receive alimony, you may need to make estimated tax payments. Alimony is treated as earned income for purposes of eligibility to make an IRA contribution.
A payment to a spouse under a divorce or separation agreement executed after 1984 is treated as alimony if it meets the following requirements:
- The payment is in cash. (includes checks and money orders)
- The instrument does not designate the payment as not alimony.
- The spouses don’t file a joint return.
- The spouses are not members of the same household at the time the payments are made. This requirement applies only if the spouses are legally separated under a decree of divorce or separate maintenance.
- There is no liability to make any payment (in cash or property) after the death of the recipient spouse.
- The payment is not treated as child support.
- Cash payments to a third party on behalf of your spouse under the terms of your divorce or seperation instrument can be alimony if they otherwise qualify.
Child support isn’t deductible by the payer, and it’s not income to the recipient. Your decree should include a definitive ending period for child support not related to the age or any life changes of your children.
A special rule applies for determining who gets the exemption for a child in the case of a divorce or legal separation. If you’re the custodial parent, you can claim the child as a dependent. However, the noncustodial parent can claim the Dependent Exemption (and the Child Tax Credit, if applicable) for the child with the consent of the custodial parent. The custodial parent can “release” the child for this purpose using Form 8332.
The custodial parent may still qualify as Head of Household, and may be eligible for the Child Care Credit, Exclusion for Child Care Benefits and Earned Income Credit for that child. The noncustodial parent can’t claim these benefits even though that parent can claim the exemption.
Custody should be spelled out clearly in the decree. If there’s any confusion, the IRS may have cause to disaffirm the claiming rights of either parent.
Head of Household Status
Several factors will determine if you’re eligible to file as Head of Household:
- You have to be either unmarried or considered unmarried (see below) on the last day of the year.
- A qualifying person must have lived in your home for more than half the year.
- You must have paid more than half the cost of keeping up your home for the year.
If a person is your qualifying child, that child is a qualifying person even if you can’t claim the exemption for that child. But if the child is married, the child is not a qualifying person unless you can claim an exemption for the child. Any other person is a qualifying person only if you can claim the exemption for that person. See IRS Publication 501 for more detail about the rules for a person who is not your qualifying child.
To be considered unmarried, you must file a separate tax return; you and your spouse must not have lived together during the last 6 months of the tax year; you must have paid more than half the cost of keeping up your home for the year; your home must have been the main home of your child, stepchild or eligible foster child for more than half the year; and you must be able to claim an exemption for the child. But if the noncustodial parent is claiming an exemption for the child because you signed Form 8332 (see above), you still meet the last requirement.
IRAs and Employer-provided Retirement Plans
Your Qualified Domestic Relations Order (QDRO) will address how the divorce affects your IRAs and employer-provided retirement plans.
A QDRO is a decree, judgment or court order that relates to benefits paid to your child, spouse, former spouse or dependent. To be considered a QDRO, a document must meet specific requirements. Failure to meet these requirements can result in unintended tax consequences.
See IRS Publication 504
See IRS Publication 1819