Authors: Attorney Daniel J. Schlichting & Law Clerk Elizabeth L. Spencer
Phone: (608)-257- 0945
Divorce presents numerous changes and challenges. One that does not often immediately come to mind is the effect that divorce will have on an individual’s income taxes. In the process of finalizing a divorce, the court may order that a spouse pay maintenance, child support, and family support. While all three forms of payment are court-ordered, most judgments by the court are actually negotiated agreements between the divorcing spouses. Divorcing spouses have an opportunity to craft a solution that best fits their situation and when negotiating should consider the tax consequences of all three types of support.
Commonly referred to as alimony, maintenance is financial support paid by one former spouse to the other pursuant to a legal separation or divorce. In Wisconsin, no spouse is automatically entitled to maintenance. In a divorce judgment, the court has discretion to grant maintenance and will determine whether to grant it based on a variety of factors found in Wis. Stat. 767.56(2c). Furthermore, the duration for which a former spouse must pay maintenance can range from a limited period to an indefinite length of time until either the payor or payee’s death. The amount may be modified or terminated by the court if there is a substantial change in circumstances.
Under, I.R.C. §§ 71, 215, if maintenance meets the IRS definition of alimony the payor may deduct the maintenance and may take this deduction regardless of whether the payor files it with itemized deductions. If maintenance is not ordered by the divorce judgement and is instead a voluntary payment made to a former spouse it is not deductible. For the recipient, the maintenance is taxable for the year it is received and is not subject to tax withholding. Thus, the recipient may need to increase tax withholding from employment income or quarterly tax deposits made during the year to avoid a penalty.
Child support is a reasonable payment to a former spouse to provide necessary care ordered under Wis. Stat. 767.51 and DCF 150.03. Child support is calculated primarily as a percentage of gross income and relative periods of physical placement of the child or children. Other factors may be considered but the mandatory legal guidelines for calculating child support are the beginning, and most often final, determination of the amount.
As an alternative to maintenance and child support, a court may order a former spouse to make fixed family support payments under Wis. Stat. 767.531. Fixed family support is a form of payment at a set amount to a former spouse that combines both maintenance payments and child support payments. Thus, it is only available to those who are paying child support and maintenance. For income tax purposes, family support may be desirable if the payor has a significantly higher income than the recipient.
Typically, fixed family support is treated like maintenance for income tax purposes unless it meets criteria for designation as child support. The Wisconsin Supreme Court has stated that family support payments are deductible by the payor and includible by the payee, Jasper v. Jasper, 107 Wis. 2d 59 (1982), while the IRS has not ruled directly on the issue. Thus, when family support payments are made by a higher-income- earning former spouse, the tax burden is shifted to the lower-income- earning recipient. The lower income recipient pays taxes at a lower tax bracket resulting in less money going to the government and more for the support of the recipient and children.
In finalizing your divorce it is important that you make choices that will be most advantageous for you and your family in the long term. If you are unsure of what decisions will provide you and your family with the most security in your unique situation contact an attorney to review the potential outcomes with you.