Child support payments are not tax-deductible by the paying parent. In addition, child support is tax-free , and neither the paying spouse or the spouse receiving payments owes taxes on it. It is important to know how support is characterized in your marital settlement agreement, because it can significantly impact your taxes. Below is important information regarding child support and taxes.
In your divorce agreement, any payments must be clearly designated as ‘child support” in order to qualify as child support. Sometimes, child support is lumped in with spousal support as “family support.” If this is the case in your agreement, none of the payment will be considered as child support for tax purposes. This can affect your taxes because family support and alimony is taxable as income to the recipient. The party would be receiving alimony which is taxable to the paying party, regardless of what the money is used for. It is important to designate separate child support in your divorce agreement if you want to receive nontaxable child support.
If a parent wants to claim the child as a dependent on their taxes, the parent must supply at least half of the child’s financial support during the tax year. When parents divorce or separate, only one parent can claim the child as a dependent. The IRS prevents divorced parents from both claiming the dependent exemption by cross-referencing the dependent’s Social Security numbers.
If parents live apart for the last six months of the year, have a written divorce decree, maintenance agreement, or separation agreement, there is another ruler that applies to the dependent exemption. If the child received more than half of their support from one or both parents, and was in the custody of one or both parents during the year, the IRS will automatically assume the custodial parent should get to claim the dependent exemption. However, the parties can agree to alter this rule and give the exemption to the other parent if one of the following is true:
- The divorce decree or separation agreement includes a provision where the custodial parent waives the right to claim the dependent exemption. (If the agreement was entered into prior to 1985, the noncustodial parent must also provide at least $600 of support to receive the exemption.)
- The custodial parent signs a declaration (using IRS Form 8332) relinquishing the right to claim the dependent exemption, and the noncustodial parent attaches this declaration to that year’s tax return. The custodial parent can use this form to relinquish the exemption for one year, a number of years, forever, or whatever the parties agree to. It is important to note that, if you relinquish te exemption, you are also relinquishing the eligibility for the child tax credit.
The IRS can disallow the dependent exemption for the noncustodial parent if Form 8332 isn’t signed and attached the tax return, under any circumstances. If the custodial parent will not sign the form, the noncustodial parent can attach the section of the divorce decree which allows the exemption.