Receiving spousal support can provide financial stability after a divorce, but it also comes with tax implications. Understanding how support payments impact your taxes can help you plan ahead and avoid surprises when filing your return.
Is spousal support taxable income?
For divorces finalized before January 1, 2019, spousal support payments count as taxable income for the recipient. The person paying support can deduct the amount from their taxable income. However, under the Tax Cuts and Jobs Act, spousal support from divorces finalized on or after this date no longer qualifies as a deduction for the payer and does not count as taxable income for the recipient.
How payment agreements affect taxes
Spousal support impacts tax treatment in several ways. The payer must make payments in cash or check, not in property transfers, to qualify as deductible under older agreements. Additionally, if payments are front-loaded within the first three years after divorce, the IRS imposes a recapture rule, resulting in additional taxes for the payer.
Differences between child support and spousal support
Both spousal and child support have different tax treatments. While spousal support may have tax implications depending on when the divorce was finalized, child support is never deductible for the payer or considered taxable income for the recipient. Misclassifying these payments can lead to issues with the IRS.
Plan ahead to avoid tax surprises
Understanding the tax impact of spousal support helps both parties plan their finances effectively. Whether you are paying or receiving support, consulting a financial professional can help you stay compliant with tax laws and avoid unexpected liabilities.