Something that many people may not understand is that there are tax consequences of different payments associated with divorce or legal separation.
The IRS wants to alert taxpayers to the different impact of various payments often seen between divorced or divorcing spouses. They issued a tax tip alert earlier this month to delineate which of them are deductible or should be included as income.
- Alimony payments ordered as part of a divorce decree or legal separation order are deductible as an expense for the paying spouse, and must be included in income for the receiving spouse. The deductions are allowable even if the taxpayer chooses not to itemize.
- For the recipient spouse, alimony payments are not subject to tax withholding, so tax payments may be necessary to account for the income. A tax planner can advise whether your overall financial situation would result in tax payments from alimony, and if estimated quarterly tax or withholding increases cover the difference.
- Child support is essentially tax neutral. It is not deductible by the paying parent, nor is it included in the custodial parent’s gross income.
IRA Deductions and Contributions
- Divorce or legal separation potentially changes the way in which both the owner of the IRA and his or her spouse can remove funds from an account. If a divorce or separation agreement is official before the end of the calendar year, then the former spouse cannot deduct contributions to an IRA. In that situation, he or she is limited to his or her own IRA funds for any tax deductions or exemptions.
- Any name changes post-divorce should be promptly reported to the Social Security Administration. Taxpayer names must match at both the SSA and the IRS. Unmatched names could end in delayed refunds or trigger audits.