Family and Finances
I’m getting a divorce. How will child support and alimony affect my finances?
Divorce can be a tumultuous process. After you have
figured out the nuts and bolts of your family finances moving forward, you’ll have to evaluate how child support and alimony payments will affect things like your taxes, state benefits and your ability to get a loan.
When you pay child support, you cannot deduct it from your income. Conversely, if you receive child support, that money will not be counted towards your income anywhere on your return. Recipients of child support also cannot count it toward earned income in order to qualify for the Earned Income Credit.
Those who pay alimony can deduct payments from their income, thus lowering their tax burden, but only if they do not live in the same home as their ex-spouse and make payments via cash, check or money order. In order to do this, your ex must provide you with their Social Security Number. If they refuse, they are subject to a fee from the Internal Revenue Service (IRS).
If you receive alimony, you must count it as income on your tax return.
When you apply for state benefits such as EBT, TANF, daycare assistance, Section 8, Medicaid or CHIP, child support can interfere. Depending on your state, if you do not currently receive child support, the state may pursue your ex for it, even if that pursuit is against your wishes. Then, you will receive part of the child support payments with a likely larger portion going to the state to reimburse them for the benefits they are providing for your child.
This division of support payments also is likely if you already are receiving child support. Whether or not you are currently receiving payments, it is advisable to discuss your application with your ex prior to filing so he or she knows what’s going on.
If you are making child support payments and need to apply for these benefits, you will likely be able to deduct your payments from your reported income, increasing your odds of eligibility.
In most states, alimony is factored in to your unearned income as a recipient, unless you are applying for disability benefits. However, taking disability benefits may reduce the amount your ex has to pay in alimony.
If you pay alimony and are thinking about applying for benefits, you may want to take your agreement back in front of a judge. Alimony payments are determined by your ability to pay; if you find yourself in a position where you need to apply for benefits, a reduction in alimony may be warranted.
Getting a Loan
If you receive alimony or child support and go to apply for a loan, the lender is going to want substantial proof that this is a reliable source of income. They will want to see alimony and child support spelled out in a court-ordered document.
Unfortunately, even with these court orders, some people fail to make their payments, so the lender will also want to see proof that your ex has paid you consistently. Expect to provide receipt of these payments for the past six to twelve months at minimum.
If you pay child support, it typically will be considered a debt in the debt-to-income ratio. This will likely lower the amount you qualify to borrow. Alimony will also be considered a debt, but if you are deducting it on your taxes, be sure to make the underwriter aware as it is already reducing your effective income. You don’t want it to count against you twice.