Paying and receiving child support comes with certain tax implications unknown to many. Single parents who receive child support may not have a clear understanding of how this affects their overall tax and the same applies to the parents making the payment.
In simple and clear terms, child support is taxable. But for who? Additionally, can the payor take a tax deduction for the amount paid as child support? Let's examine what is applicable in different situations.
What qualifies as child support for tax purposes?
For tax purposes, your judgment of divorce or custody order must clearly label payments as "child support." In this case, the payments will be tax neutral - and therefore categorized correctly for tax purposes.
However, let's say that your divorce decree lumps your child support payments with alimony and calls them family support or spousal support. In this case, your spouse will have to claim the payments as income for tax purposes, and the payor will receive a tax deduction for all amounts paid if the divorce was finalized before January 1, 2019. Divorces finalized after December 31, 2018, will apply the new tax law, and neither spouse can claim spousal support as a deduction or as income.
The Receiving Parent
For a receiving parent, the IRS doesn't tax child support and as such, you won't owe more taxes for receiving child support. Although it may seem as income, the IRS views it differently; as money received on behalf of the child and not as personal income. Additionally, the amount has been charged from the payer, hence you are exempted.
So, child support payments do not have to be claimed as income by the receiving party. For recipients of child support, do not include tax support payments in your gross income calculation for the year.
In addition, your child should not claim child support as income.
The Paying Parent
The income that funds the child support is taxed without any special considerations. The payer owes tax and it's not deductible. If you pay child support you can not deduct it from your taxable income.
If a parent fails to make the proper court-ordered payments, regardless of their reasons, then they are in contempt of court. Missed payments are tallied by the court and classified as "arrears.". State and federal tax refunds can be intercepted to cover late child support payments.
Is paying child support tax-deductible?
There may be some parents who wonder if the child support they pay to their ex is tax-deductible. Unfortunately, the IRS says this - no.
IRS rules state that child support payments are neither taxable income for the receiver nor deductible for the payer. Since child support payments are considered personal expenses by the IRS, they cannot be deducted from tax returns.
This income remains as income because if the child were to live with that parent, it would go towards the costs of childrearing. Standard child expenses aren’t deductible from income.
It does not matter whether the payments are to purchase clothing, housing, or other personal needs for your child. It is all nondeductible.
Are there ways to pay child support without being taxed?
A parent can claim their child as a dependent and qualify for certain tax credits. However, this is feasible only if the child or children stay with you primarily or for more than 6 months. This opportunity is open to only one parent who files as the head of the household and not both parents. Child and Dependent Care Tax Credit is not automatic. Your income must fall below the benefit threshold else you may still not qualify.
In general, if the parents cannot agree on a plan to use the tax exemptions for dependent children in a way that's fair to both, the court will decide on a plan based on each parent's share of the total income that can be used to support the child.
A few exceptions apply, however. It is up to the other parent to take a dependency exemption if the parent with the right to take it currently does not receive a tax benefit from doing so. Additionally, a court may take away the dependency exemption from a parent who has a history of missing child support payments.
IRS Form 8332
The rule of thumb is that only one parent can claim the custody of a child, but in some cases, the non-custodial parent may enjoy the benefits of having the child as a dependent if there is a written and signed document from the custodial parent. When it's time to file taxes, the non-custodial parents can attach the signed IRS Form 8332 to their return to get a dependent exemption or the Child Tax Credit.
You must include the statement or the signed Form 8332 when you file your return. By doing so, you can claim the dependent exemption and child tax credit. Non-custodial parents are not eligible for the Earned Income Tax Credit even if they have permission to claim the dependent.
The contract must state the following:
- Noncustodial parents have the right to claim children without regard to any conditions, such as paying support
- During which years the noncustodial parent can claim the child
- The custodial parent will not claim the child for those years
Should your divorce lawyer handle child support tax issues?
Divorce and child support actions may bring up tax issues that are tempting to ask your divorce lawyer to resolve. There's no doubt that taxes are a very complicated area. If you suspect you may have tax issues arising out of a divorce or child support action, you should consult a tax professional instead of your divorce lawyer.
Child dependency and child tax credit provide the custodial parent with tax relief upon separation or divorce. If you are at the receiving end of child support, you won't get taxed for the amount received and you as well qualify for tax credit and dependency if you directly take charge of the child's welfare. As the paying parent, the income used to fund child support is taxed and you'll not qualify for any form of tax relief or credit. However, IRS Form 8332 signed by the child's custodial can give you certain tax benefits.
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