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Don't fall into tax traps with spousal support payments

A new year is upon us, which can mean only one thing — it's time to start gathering up W-2s and 1099s and other related tax documents in preparation for filing income tax returns.

If you are divorced and either receiving or paying spousal support, it's important that this income or expense be properly recorded as well. Recipients of spousal support must claim it as taxable income, and those ex-spouses who pay it can claim it as a legitimate deduction.

This is why it is very important that those going through divorce fully understand the impact spousal support will have on their bank account. For instance, if you are paying out $30,000 per year as spousal support, what is that amount actually costing you when the tax deduction is calculated? Conversely, what is the recipient of the 30k receiving with the added burden of taxes?

Don't confuse payments made for child support as spousal support, as they are two distinct matters, and for payments to count as spousal support, they must meet specific requirements.

Child support is considered to be non-taxable income to the recipient and does not qualify as a tax-deduction for the payor. Those who receive or pay both spousal and child support in a single monthly sum have to be very careful when reporting it, as lumping the two together for tax purposes can get one into hot water with the Internal Revenue Service.

Improperly structured support payments can wind up costing a bundle in penalties, interest and back taxes if your divorce judgment doesn't properly spell out the two sums as separate payments. Does this mean that an ex-spouse cannot send a single check or deposit each month for both sums? No, it doesn't, but it does mean that both parties must be able to note the division clearly when tax time rolls around.

Sometimes support payments can be made as third-party payments, as in when an ex has a drug or gambling addiction or is otherwise incapable of managing the support payments themselves. In these cases the third-party payments can be directed as payment toward living expenses and still count as legitimate deductions for the payor. This, too, should be clearly spelled out so there is no confusion as to its purpose.

Source: divorce.mag.com, "Tax Tips and Traps," Diana Shepherd, CDFA, accessed Jan. 08, 2016

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