In our family law and divorce practice, clients often ask, “How does child support affect taxes?” They are well aware that during their marriage, they received tax benefits for claiming their children as dependents. These tax breaks can include a higher standard deduction, an exemption for each dependent child, a deduction for childcare costs, a deduction for educational expenses, and a child tax credit. Most of our clients shared these benefits by filing jointly, but those days will soon be over. So, parents who anticipate paying child support naturally feel they should continue to claim their children as dependents, and those receiving child support fear they might lose a tax deduction. Yet, this isn’t the way it works in the law.
Which Parent Gets the Child Tax Benefit?
In most cases, U.S. tax law grants the child tax benefit to the parent who is the primary caretaker, i.e., the custodial parent. This is the parent with whom the children live most of the time. This parent is also usually the recipient of child custody payments. “So,” you ask, “the parent who’s getting paid child support also gets to claim the kids on their tax form? Isn’t that double-dipping?” At first blush, it certainly seems that way.
However, there is some logic behind the government’s position. When the parents are married, they are both supporting the children, whether by earning income for the household, acting as a caregiver, or both. The law presumes parental contributions to the raising of their children to have equal value. An order of child support doesn’t impose a new duty on the payee; it is meant to ensure that both parents continue to support their children at the standard of living established during the marriage.
Child Support Is Not Taxable or Deductible
Child support really has no direct bearing on taxes. Recipients do not claim child support as income. Payees do not claim support as a deduction. The parent with whom the child lives most of the time is allowed the deduction.
Yet, this arrangement may not provide the greatest benefit for the parents. The recipient parent is often the lower earner, so the tax deduction provides less of a benefit than it would for the top-earning, payee parent. For example, if the recipient is taxed at 15 percent and the payee is taxed at 35 percent, giving the benefit to the child support recipient loses money. Over time, those losses can be substantial.
How to Maximize Your Child Tax Benefit After Divorce
Fortunately, there is a way around this conundrum. The custodial parent can cede the tax deduction voluntarily to the noncustodial parent by filling out an IRS Form 8332. Once that form is filed, the noncustodial parent can claim the child tax benefit. Why would the recipient spouse surrender the child tax benefit? Generally, this involves some negotiation, where the payee agrees to raise the amount of support in exchange for the right to claim the children as dependents.
On the other hand, if the recipient spouse’s income is very low, claiming the dependent child could make that parent eligible for a Child and Dependent Care Tax Credit. This could mean additional tax breaks for some childcare expenses, such as daycare, babysitters, camps, and after-school care.
Because every family situation is different, you need to get personalized attention from a knowledgeable and experienced family law attorney. Be sure you select a strong advocate, who will uphold your rights, while working to find creative solutions that deliver the best tax benefits for your child custody and support agreement.