To qualify for support or separate support, the payments you make to your former spouse must meet the following six criteria: Depending on the couple`s assets, age, and goals, it may make sense for a low-income spouse to take on more retirement assets, such as IRAs and 401(k). in exchange for reduced child support. This could effectively allow the nurturing spouse to “pay alimony” through a retirement asset. The payer finances part or all of the support payment by transferring funds without ever paying taxes on them. Therefore, paying with pre-tax dollars gets the same benefit as the previous maintenance tax deduction. The beneficiary spouse has to pay taxes on the retirement account payment, but they have more assets to earn more income and control. They own the assets no matter what, rather than relying on the payment of support, which would be subject to restrictions, including the risk of death of the payer. This article explains the information on page 10 of IRS Publication 5307, Fundamentals of Tax Reform for Individuals and Families to Eliminate the Child Support Deduction under the Tax Cuts & Jobs Act of 2017. If you divorce, you may have an unpleasant tax surprise when you file your tax return: you cannot deduct the support payments you pay as part of the divorce judgment. On the other hand, if you`re standing in line for maintenance, you don`t have to. A spouse with no taxable income could sell shares worth $100,000 with a profit of $39,000 and pay no tax, while the breadwinner earning $500,000 would have had to pay $9,282 to sell.
As a result, a couple with a large investment portfolio could greatly benefit from transferring their large profit assets to a low-income spouse. The payer can use the income they would have used to pay child support to buy more shares to replenish their portfolio. Each family`s situation is unique and there are usually many moving parts in a modern divorce settlement. Changing one component often causes a ripple effect on the others. Changing the amount of child support can change child support, which can affect the division of property. While these strategies look great on paper for tax lawyers, CPAs and chartered divorce financial analysts, complexity can cause more confusion and challenges in resolving the case than the tax benefits are worth. But with careful divorce planning, smart couples can negotiate a win-win situation by giving less to the IRS. If your agreement includes child support, you`re probably wondering if it might affect your return. In 1942, Congress passed the Revenue Tax Act, which resolved Gould v. Gould, which states that alimony payments are not taxable income.
Since then, the spouses of the payers can deduct support payments to the other spouse. In 2017, a tax reform changed the way child support payments were taxed. If this is your first time filing a tax return since your divorce, read on to find out if child support is tax deductible. The taxation of support payments on federal tax returns has recently changed due to the Tax Cuts and Jobs Act of 2017 (TCJA). Today, separate alimony or alimony under divorce or separation agreements concluded on or after January 1, 2019 is not tax deductible by the maintenance debtor. The recipient of alimony is not required to report child support as income. Let`s take a closer look at the rules. Before the TCJA came into force, you could deduct support payments under a divorce or separation agreement if certain conditions were met, while support payments received were treated as taxable income. In contrast, child support was neither tax deductible by the payer nor taxable for the recipient. Note that support payments made under an agreement entered into before 2019 and amended thereafter are not deductible if the terms of the agreement are changed and the parties determine that the payments are not deductible support or taxable income. As mentioned earlier, child support payments are no longer tax deductible and also cannot be reported as income on tax returns if your divorce agreement was made as of 2019. For all divorce agreements that include child support and were made before 2019, you can still deduct payments or report support payments as income.
Prior to the amendments to the Tax Cuts and Jobs Act, support payments made by the person making the payment were tax deductible. The person receiving support had to report it as income on their federal income tax return. If you`re still able to deduct child support payments or report them as income on your 2020 tax returns, don`t assume so quickly that this loophole won`t affect you. There could be more raids on taxpayers who contributed to the discrepancy in support payments deducted or claimed on previous tax returns. This could include IRS fines and increased audits of applicants. People whose divorce agreements are dated January 1, 2019 or later are not required to provide support information on their tax return. For a child support payer who also has strong philanthropic values, using a RTA to fund at least a portion of child support payments could be a tax-advantaged strategy from different perspectives. First, the breadwinner may benefit from a tax deduction calculated on the value of the assets contributed and indicate his former spouse as the beneficiary of the income for the duration of the maintenance due. The annual income of the trust is paid to the beneficiary spouse and is taxable. Savvy couples can take advantage of differences in their tax brackets to save their combined taxes and share the amount they should have paid to the IRS. While the abolition of the support deduction is permanent, we never know when the law might change again. It`s wise to add provisions for tax changes in your Marriage Settlement Agreement (MSA) with details on what can be changed.
If there is another change in the tax law, I hope you can limit the changes to child support. There are other provisions in the new tax law that expires in 2025 that make maintaining the marital home more expensive and make children less valuable as tax exemptions.