What are the tax consequences of child support?

Making legally-mandated child support payments has no tax consequences for either the person making the payments nor the person with custody of the child who is receiving them. In general, child support payments are considered “outside” of the tax system for both parties. In other words, they don’t affect taxes and are not of interest to the IRS. The person making the payments cannot deduct the payments as any sort of expense, and the other person does not have to list the payments as income. The payments are thus tax-free to the recipient and do not provide any tax benefit to the payer.

Rules for Taxes and Child Support Payments

This tax-free law only applies to payments made strictly as child support. Any alimony payments paid for the support of an ex, or even any payments made as some form of general family support for both children and an ex-spouse, would have an impact on taxes in the vast majority of situations. This is because the federal government considers money going from one ex to another as income-shifting, and income-shifting is typically a taxable procedure. (On divorce or separation agreements signed after January 1, 2019, alimony payments are not deductible by the payor or considered taxable income to the recipient.) Child support, on the other hand, is non-negotiable and outside the reach of taxes.

Taxes and Alimony

Those who create their own divorce settlement plan outside of court may sometimes opt to provide for higher “alimony” payments in exchange for lowered child support. The payments could act as a disqualifying factor for some income-contingent programs since the alimony would need to be reported as a form of monthly income. However, beginning 2019, the spouse who pays the alimony can no longer deduct the amount; the recipient no longer pays taxes on it.

Getting Help

To ensure that any alimony, child support or other agreement is written in a manner that makes the most financial sense for you, you should strongly consider speaking with a lawyer for guidance.

Tax Consequences of Child Support: Case Studies

Case Study 1: Regular Child Support Payments

John and Sarah are divorced, and John is responsible for paying child support for their two children. John’s monthly income is subject to income tax, but the child support payments he makes to Sarah have no tax consequences for either party. John cannot deduct the payments as expenses, and Sarah does not need to report them as income. The child support payments are tax-free and solely intended for the support of the children.

Case Study 2: Alimony vs. Child Support

Emily and Michael are going through a divorce and need to determine the financial arrangements, including alimony and child support. They decide to structure their agreement in a way that provides higher alimony payments to Emily in exchange for lower child support.

However, beginning in 2019, the alimony payments made by Michael are no longer tax-deductible, and Emily does not need to report them as income. Child support payments, on the other hand, remain tax-free. Emily and Michael consult with their respective attorneys and financial advisors to understand the tax implications and reach a fair agreement.

Case Study 3: Income-Shifting and Taxes

Lisa and David have a complex financial situation and want to minimize their tax liabilities while ensuring the well-being of their children. They consider income-shifting strategies, such as allocating more funds to child support rather than alimony, to reduce their overall tax burden.

However, they seek professional advice from a lawyer and tax specialist to ensure that their arrangements comply with tax regulations and to understand the potential consequences of income-shifting on their financial situation.