Finalized divorce and separation agreements commonly involve alimony and child support arrangements. These arrangements affect the tax situation of both the payer and payee. Following are three general rules to remember:
- Alimony paid is deductible by the payer. In order to deduct alimony paid, the payer must include his or her spouse’s Social Security number or Individual Taxpayer Identification Number on the Form 1040 return.
- Alimony received is taxable to the payee and must be reported as income on the Form 1040. Alimony is not subject to tax withholding, so it may be necessary to increase the tax paid during the year to avoid a penalty. Possible solutions to address this situation include making estimated tax payments or increasing the amount of tax withheld from wages.
- Child support payments are neither tax deductible by the payer nor taxable to the payee.
The guidelines above are very general: the tax situation can become very complex depending on formal couple’s financial situation. Contact us today for help with your specific circumstances.