Tax Considerations Relating to Child Support

For federal income tax purposes, payments of child support are not tax-deductible by the parent who makes the payments but child support payments are tax-free to the recipient. In order to qualify as child support, the amounts a custodial parent receives must be designated as child support in the divorce or separation agreement. None of the payment that is lumped together as either family support or alimony is considered child support for tax purposes. In addition, family support or alimony is taxable to the recipient.

Contingencies

If a payment is reduced upon the happening of a contingency relating to the child then the payment must be treated as child support. The contingency could be the child attaining a specified age, marrying, dying, leaving school, etc.

Claiming Children as Dependents on Tax Returns

In general, for someone to claim a child as a dependent, he or she must provide at least 50 percent of the child’s support during the tax year. Where parents are divorced or separated, only one parent may claim the dependent exemption. A special rule applies if the parents have a written divorce decree, maintenance agreement, or separation agreement or if the parents lived apart at all times during the last six months of the calendar year. In that situation, the custodial parent gets the exemption if a child received more than half of his or her total support for the year from one or both parents and was in the custody of one or both parents during the year.

Exemption May Be Allocated to Non custodial Parent

The parties may change this presumption and allocate the exemption to the non custodial parent if either the divorce decree or separation agreement contains a provision in which the custodial parent waives the right to claim the exemption or if the custodial parent signs a declaration relinquishing his or her right to claim the exemption and the non custodial parent attaches the declaration to his or her tax return.

Test for Determining Which Parent May Claim Child as Dependent

If the parents do not have a written document, did not live apart during the last six months of the calendar year, or are not married, the test for determining which parent can claim the child as a dependent is that the parent who provides more than 50 percent of a child’s support during the tax year can claim the child as a dependent.

Adjustment of Alimony and Child Support Payments to Meet Tax Needs

It is often to the payor’s advantage to pay more alimony and less child support, even if the total monthly payment is the same. Additionally, child support payments are often set by state-imposed guidelines and formulas, which are less flexible than they were in the past. These guidelines and formulas often do not take into account the tax benefit realized by the custodial parent. The existence of the guideline and formulas make it more difficult to adjust the numbers up and down to meet tax needs of the payor.