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Divorce and taxes: How paying child support and alimony can reduce your tax bill

It’s tax season, baby! Yes I know. It’s a $%#^ing nightmare. But let’s not curse.

Okay. Okay. Let’s see. Let’s see if we can figure out this issue. It’s very convoluted and I hate it, frankly, this tax business. Ew. But, paying child support is supposed to be good for your tax bill. It reduces it. Just like receiving child support is bad for your taxable income. It increases it. Well, wait. No. I’m wrong. Scratch that. Scratch it!!! You don’t pay taxes on child support and you don’t get a deduction for paying child support. That is the general and applicable rule in New York at the moment. CHILD SUPPORT IS NOT TAXABLE TO THE PARENT WHO RECEIVES IT.  (in other words they exclude it from income) AND IT IS NOT DEDUCTIBLE BY THE PARENT WHO PAYS IT (in other words you don’t get a deduction because you paid child support.)  Did I get that right? Yes, I think so. I think that’s right.

Okay. Let’s talk about the Exemptions issue, though, which is a bit different from the deductions issue. Yikes. I know. Headaches. Problems. But, well, the rule, is that, the custodial parent usually gets the exemptions after a divorce. Okay? But, in practice, the parties usually agree to alternate who gets the exemptions from year to year. Or, if there is more than one child, they split the kids for exemptions purposes.

Okay. So far so good? Okay. Now. This whole idea of the custodial parent being entitled to the exemption can be a burden for the non-custodial parent who does not get the exemption, and who also cannot deduct this expense. And it may be a sort of “windfall” for the noncustodial parent who can exclude this income from taxable income, and yet, they get the exemption. So the court has an interest in crafting a “tax wise” arrangement for divorcing couples.

Okay. But. It is not as if the non-custodial parent, or the court for that matter, can actually force the custodial parent to give up the exemptions to the non-custodial parent, or to share them, or alternate them. Nothing in the Internal Revenue Code requires this – and Federal Law would technically trump state law on this, if there was a conflict.

Okay. Now. There are a whole bunch of cases in New York that goes to this issue of exemptions, cases like Wright v. Wright, 214 AD 2d 558 holding that (“whether to allow the noncustodial parent to have the exemption is very much dependent upon the facts and circumstances of the particular case”), Guarnier v. Guarnier, 155 A.D. 2d 744 (holding that “where both parties are wage earners and contributing to support, and there are multiple children, the court may allow each parent to claim a child on his or her returns.”) Bennett v. Bennett, 140 A.D. 2d 400 (“Appellate Division Second Department affirmed the denial of a request  by a non-custodial parent for an order entitling him to claim the child dependency exemption.”)

But if you are the custodial parent, don’t be too gleeful. The court is not precluded from making an order of who gets the exemptions, when all is said and done.  The court can order the custodial parent to “execute a waiver or release the exemption.”  And if the parent refuses? Well, the court could then reduce your alimony and even the child support award, so that the burden to the non-custodial spouse is not so weighty. In other words, the court can back you into a corner and force you to give up or share the exemptions, by threatening to give you less alimony or less child support.

Okay. Let’s talk about Alimony. Alimony is taxable to the recipient and deductible to the spouse who pays as a general rule. Sometimes, alimony and child support are lumped together in one payment. Then, you have to determine which portion is for child support and that portion would follow the general rules as they pertain to child support. There are generally 3 ways to determine what portion is going to follow the child support rule and which portion will be alimony.

1) The divorce or separation agreement fixes a portion as payable for child support

2) the payment will be reduced on the happening of a contingency related to the child,

3) The payment will be reduced at a time clearly associated with a contingency related to the child.

The rest of the money will be alimony and will be both taxable and deductible. The thing with alimony is that it is not so straightforward either. It could be a non-taxable property settlement, or it could be taxable alimony. The payment is classified as alimony under the following conditions:

1) The payment is made in cash

2) The payment is received by or on behalf of an spouse under a divorce or separation instrument

3) The divorce or separation instrument does not designate the payment as not alimony

4) In the case of a legal separation, the payor spouse and the payee spouse are not members of the same household at the time the payment is made, and

5) There is no liability to make any payment  for any period after the death of the payee spouse.

If you satisfy these five conditions, you will be paying taxes on the alimony payments and the -ex spouse will be getting a deduction on it.

Okay. This was a long post and required too much thinking. I think I need an apple martini after this one. What about you? Go read a fun post, like how to “divorce-proof your marriage, Ms. Sasha Fierce.” Let’s see. I am going to try to find you the link…http://www.divorcesaloon.com/how-to-divorce-proof-your-marriage-ms-sasha-fierce. That one made me laugh. Seriously.

 Source for this post: New York Law of Domestic Relations by Alan D. Scheinkman

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