Divorce comes with financial obligations, usually from one side more than the other. It is an expensive process, and it can be like going through a maze, where you lose money at every dead end. The goal is getting through that maze with the least monetary damage possible, and there are a few things you can do if you have the necessary knowledge.
One of the things that should help you make sure you pay attention is the difference between alimony and child support. You can tell the difference by being strategic in how you divvy it up during your divorce settlement, which can save you quite a few headaches.
This obligation is on the part of the couple who makes the most money. You want to get as much of your divorce settlement as you are allowed in the form of alimony payments for the following reasons:
1. Alimony payments are tax deductible.
In other words, they are taxable income for your ex. If you have already sent payments before the divorce was finalized, check to see if they also qualify as deductible. If so, your ex will also be taxed on those.
2. Make sure you know IRS laws.
In a divorce settlement, there are multiple things that can count as tax deductible. Try to obtain them as much as possible. Often, lawyers don’t even know the types of things that can be deductible unless they have experience in tax law. So be sure the research has been done.
Through all of this, you must also be careful about being “front-loaded” with “excess alimony,” as the IRS will be watchful if your alimony payments are too concentrated in relation to other parts of the divorce settlement. It is a delicate balance, but worth going for if you can swing it. It might require the help of a CPA.
Be aware of “IRS recapture,” which is applied if the alimony is decreased or terminated within the first three years.
The rule says that any alimony not paid per the original agreement will be counted as income for the payer of alimony, and will then be taxed accordingly. This situation usually occurs when the payer of alimony is unable to make the payments on time—because the receiver of alimony no longer needs the payments.
Keep all of these issues in mind when determining the alimony agreement in the divorce decree. After everything you have been through, the last thing you need is an unexpected tax bill!
Now would be a good time to consult a professional like a divorce coach, who has seen this scenario time and again, and will be able to show you how to forecast the alimony agreement in the most beneficial way. At the same time, the receiver of the alimony is then able to reduce that same amount from their income. Therefore, they will be taxed less for that period.
In most states, alimony usually ends after the receiving ex is either cohabitating or remarried. Check the laws of your state to see if this applies to you.
Factors that determine Alimony:
* Length of marriage
* Income difference
* If one of the divorcing spouses does not work
* Standard of living
* Asset division
Sometimes, people think that alimony is not as important as child support, so they refuse to pay it, thinking there are no consequences. Try not to fall into this trap. Nonpayment of alimony is not a crime, but if the other party goes into litigation, you can be found in contempt of court and serve jail time for the contempt charge.
Child support will be the obligation of whomever has the least amount of custody. If the divorce settlement allows for joint custody, it is more of a gray area and will depend on your state. Some states will order the spouse who makes more money to pay child support, while other states will go by the percentage of time the children spend with each parent. It is important to check to see how the family courts in your state deal with how child support is decided upon and calculated.
Child support payments are not tax deductible. In other words, it is not taxable income for your ex. Keep in mind that any divorce property settlements are similarly treated.
Be careful with "contingencies related to a child," which can make part of your alimony count as child support, therefore nondeductible and tax-free for your ex. Again, make sure the research is done. Most parts of the settlement that deal with the children in any way will most likely not be deductible.
Also, be aware of “alimony recapture” in this situation, as any changes to alimony that consecutively occur with changes to child support will then be considered child support and will be reassessed as such. An unexpected tax bill can hit you hard, so be careful.
Try to do all of your child support payments through a CPA. Many divorce attorneys will offer to do the payments for you, but as we mentioned before, they are not as knowledgeable about how alimony and child support works with our tax laws. A CPA will be a far safer alternative, as they will be able to point out any potential tax problems that a lawyer might not see.
Not paying child support is a crime, and it can lead to many difficulties. It is not something to mess around with. Therefore, it is especially necessary to do all of your homework and know that your lawyers understand all ramifications.
Both Alimony and Child Support have sensitive aspects that need to be considered and researched. Knowledge is power, which is never truer than during a divorce. If you want to save the most money and the most headaches, consider hiring a professional who can help you look at alimony and child-support decisions from all angles.
When you see the difference between alimony vs child support, it is easy to see how many common beliefs can easily lead you astray. Tread carefully as you seek the best-case scenario for your individual situation. If done well, you can move forward and move on with the best possible scenario.