Delivery alert

There may be an issue with the delivery of your newspaper. This alert will expire at NaN. Click here for more info.

Recover password

Neither alimony nor child support are taxable

Q: I am finalizing the terms of a divorce from my husband of 19 years. We have two children and I will get custody with my husband having visitation. He will pay me alimony and child support. I am aware that alimony is no longer tax-deductible but wonder if that is also the case with child support.

A: There are a few things to clarify. First, for divorces finalized after 2018 alimony is no longer a tax deduction for the party making the payment. This alsoJim Hamill means that the recipient does not have to include the alimony in income.

For pre-2019 divorces, the alimony paid could be deducted but the recipient had to include the payment as income. This was often favorable because the payor is generally in a higher tax bracket than the payee, so through negotiations the parties could decide how the tax benefits and detriments could be shared.

Now the alimony is no longer a tax issue for either party. And let me clarify that any divorce finalized before 2019 continues to be taxed under the old rules, even for tax years after 2018.

Child support was never deductible by the party making the payment and was never income to the recipient. Support is intended to address the needs of the child. If it was taxed there would be less money available, after tax, than might be needed to support the child.

Any monies that you receive for both alimony and child support will not be included in your taxable income. However, your husband will also not be able to claim a tax deduction for the alimony as may have been true had your divorce occurred in 2018 or earlier.

You should be aware that the property settlement that you negotiate may have tax implications. Property settlements are not income but anything that you receive from your husband will result in you taking over his tax basis.

Tax basis is used to determine gain or loss on a future sale. You and your husband should consider the tax effects of how you divide marital property.

Q: When I was an undergraduate student in college my parents paid my tuition directly to the school. We were told this was not a gift because the money never passed through my hands. I borrowed money to obtain a master’s degree and graduated with $23,000 of debt. After I made payments for several years my parents paid off the balance of $18,400. Because this related to college costs is there a way for me to treat this as not being a gift?

A: Payments made directly to a college do not need to be reported as gifts. Payments made to medical care providers are treated the same. The loan repayment doesn’t qualify for this exception to gift treatment. The person who received the gift doesn’t report it as income.

You will not have to report anything related to your parents payment of the loan. Your parents have made a gift of $18,400 to you. If their payment came from community funds (because New Mexico is a community property state), each of your parents has made a gift of $9,200.

The tax law allows each person to gift as much as $15,000 without reporting the gift to the IRS. The person receiving the gift must have a present right to enjoy the property for this $15,000 exclusion to apply.

When a donor transfers money to a third party for the benefit of another person, such as your parents’ payment of your loan, the courts treat the transfer as if the money was given to you with you then paying the loan. This will qualify the transfer for the $15,000 annual exclusion.

This means that your parents do not need to report the loan repayment as a gift. The only exception would be if your parents have made other gifts to you during the year that, in total, exceed $15,000 for each of your parents.

The loan repayment will not be part of your taxable income. This is true no matter how large the gift may be. The tax law simply says that gifts received during the year are not included as income.

James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

 

AlertMe
TOP |