What Are the Tax Implications of Divorce and Child Support?
Divorce impacts more than just your daily life—it also affects your financial and tax responsibilities. For Maryland residents, it’s important to know how divorce and child support may influence your tax filings.
The Internal Revenue Service (IRS) treats certain post-divorce financial arrangements in specific ways, and missteps can lead to penalties, audits, or incorrect filings. Kathleen M. Kirchner, Attorney at Law, has been serving clients for over 15 years in Annapolis, Maryland. Reach out today to receive trusted representation.
Filing Status Changes After Divorce
One of the first tax-related changes after a divorce is your filing status. If your divorce is finalized by December 31, the IRS considers you unmarried for that entire tax year. That means you can't file jointly for that year, even if you were married for part of it.
After divorce, you’ll typically file under one of these statuses:
Single: If you don't qualify as head of household.
Head of Household: If you paid more than half the cost of maintaining a home for your child, and that child lived with you for more than half the year.
Filing as head of household often offers better tax rates and a higher standard deduction than filing as single. To qualify, the child must be your dependent and live primarily with you.
Claiming Children as Dependents
Only one parent can claim a child as a dependent in any given tax year. If parents share custody, the IRS defaults to allowing the parent with whom the child lived the majority of the year to claim the exemption. However, this can be modified by written agreement or court order.
In Maryland, custody agreements often spell out which parent gets to claim the child. In alternating-year arrangements, parents trade off the exemption annually. It's essential to file IRS Form 8332 if the non-custodial parent is claiming the child. Without that signed form, the IRS may reject the dependent claim.
Child Support Payments and Taxability
Child support payments have no effect on federal income taxes for either parent. That means:
The parent paying child support can't deduct those payments from their taxable income.
The parent receiving child support doesn't include it as income.
This rule has been in place for years and reflects the IRS's view that child support is a non-taxable transfer for the child’s benefit. Unlike alimony, which may be treated differently depending on the divorce date, child support payments are never deductible or taxable.
These rules apply whether the payments are voluntary or court-ordered. Even if payments are late or modified, their tax treatment doesn't change.
Distinguishing Between Child Support and Alimony
It's critical not to confuse child support with alimony, as they carry different tax implications. For divorces finalized before January 1, 2019, alimony was considered taxable income to the recipient and deductible for the payer. However, according to the Tax Cuts and Jobs Act, divorces finalized after that date are no longer deductible or taxable for either party.
Child support has always remained non-taxable and non-deductible. Courts often issue combined support orders, but they must clearly distinguish between alimony and child support. If a support order isn't clearly defined, the IRS may make its own determination, which could lead to penalties.
When reviewing your support order or negotiating terms, clarity matters. You’ll want to be precise about the amount and purpose of each payment.
Tax Deductions Related to Children
While child support payments themselves don't carry tax deductions, several child-related tax benefits can impact your return. These include:
Child Tax Credit: Available to the parent who claims the child as a dependent. The credit amount depends on income and the number of children.
Earned Income Tax Credit (EITC): Available only to the custodial parent who meets income requirements.
Dependent Care Credit: Available to the parent who pays for childcare while working or seeking work, assuming the child lived with them for more than half the year.
These credits can significantly reduce your tax bill, so it’s important to determine ahead of time which parent is eligible to claim them.
Medical Expenses and Insurance Premiums
Medical expenses for a child can often be deducted by the parent who pays them, regardless of which parent claims the child as a dependent. If you itemize deductions, you may include out-of-pocket expenses for your child’s medical care—even if you don’t claim the child on your return.
In Maryland divorce cases, one parent is usually assigned responsibility for providing health insurance. If premiums are paid through an employer-sponsored plan, they typically don’t affect your tax liability. But if you're self-employed or pay directly for insurance, those premiums may qualify as deductible expenses.
Always keep detailed records of all medical payments, especially if they’re part of a court order or custody agreement. At Kathleen M. Kirchner, Attorney at Law, there is an emphasis on maintaining quality representation throughout your case, including obtaining all of the necessary records.
Property Transfers and Capital Gains
During a divorce, couples often divide property such as homes, vehicles, and investment accounts. These transfers are usually tax-free if made under a divorce agreement. The IRS doesn’t treat them as sales or income-producing events.
However, if you sell property later, capital gains taxes may apply. For example, if one spouse receives the family home and later sells it, they may owe capital gains tax depending on the appreciation since the original purchase.
In many cases, couples avoid these taxes by selling the home while still married and dividing the proceeds. This strategy can make full use of the $500,000 exclusion available to married couples filing jointly.
Retirement Accounts and Tax Consequences
Dividing retirement accounts during divorce requires careful planning. A mistake can trigger penalties or unexpected taxes. According to the IRS, penalty-free transfers are allowed if they’re made under a Qualified Domestic Relations Order (QDRO).
Without a QDRO, withdrawals from a 401(k) or pension plan may be taxed and penalized as early distributions. IRAs don’t need a QDRO, but the divorce agreement must clearly state the terms of the transfer.
It’s also important to consider future taxes. The receiving spouse will pay income tax on withdrawals from traditional retirement accounts. Roth accounts, on the other hand, may offer tax-free withdrawals if certain conditions are met.
Child Support Enforcement and Tax Refunds
If a parent falls behind on child support payments, enforcement agencies have several tools at their disposal, including intercepting tax refunds. The Treasury Offset Program allows federal and state tax refunds to be redirected to cover unpaid child support.
This can affect both the paying parent and any new spouse if they file jointly. In such cases, the non-liable spouse may need to file an “injured spouse” claim to recover their portion of the intercepted refund.
Being current on child support obligations is not only a legal duty but also protects against future financial disruptions during tax season.
How Spousal Agreements Affect Taxes
Many Maryland divorce settlements include negotiated agreements that cover asset division, support, and other financial responsibilities. These agreements can have lasting tax consequences, particularly when they involve property sales or structured payments.
Spouses can agree on which party claims certain deductions or how future tax burdens will be handled. However, the IRS only honors these agreements if they’re consistent with federal tax law. For example, you can’t make child support deductible just by agreeing to it.
It’s important to consult both legal and financial professionals before finalizing any written agreement. Even small changes in how payments are labeled or how assets are transferred can result in major tax differences.
Reporting Requirements After Divorce
After a divorce, you may need to update your tax documents and report certain items differently. Here are a few key points to consider:
Update your filing status with the IRS.
Adjust your W-4 form with your employer to reflect changes in dependents and deductions.
Report alimony payments correctly, if applicable.
Keep copies of your divorce decree, child support order, and any financial settlements.
These documents may be requested by the IRS during an audit or if there’s a dispute over dependency claims. Keeping accurate records helps protect your interests and speeds up the filing process.
When To Amend a Return
If you’ve already filed your taxes but realize you made an error related to divorce or child support, you may need to file an amended return. This can happen if:
You and your former spouse both claimed the same child.
You forgot to include or exclude alimony income.
You failed to update your filing status.
IRS Form 1040-X allows you to correct most mistakes. There’s generally a three-year window for making amendments, but it's better to act sooner to avoid interest or penalties.
Experienced Legal Support
If you're dealing with divorce or have questions about child support and taxes, it's smart to get guidance that fits your circumstances. Kathleen M. Kirchner, Attorney at Law, confidently serves clients in Anne Arundel County, Queen Anne’s County, Calvert County, Prince George’s County, and Howard County, Maryland. Reach out today for more information.