What you need to know about your taxes if you pay or receive child support.
For federal income tax purposes, child support is tax-free to the recipient, meaning neither the ex-spouse nor the child owes taxes on it. However, child support payments are not tax-deductible by the parent who makes the payments — unlike spousal support payments. (Spousal support is tax-deductible for the person who makes the payments and taxable to the recipient.)
Be careful how support is characterized in your marital settlement agreement, as it may have significant tax consequences.
What Qualifies as Child Support?
In order to qualify as child support, the payments received by an ex-spouse must be designated as child support in the divorce or separation agreement. If the agreement lumps the payments together as "family support" or "alimony," or doesn’t otherwise designate a specific portion of each payment as child support, none of the payment will be considered child support for tax purposes.
This can have adverse tax consequences for the recipient of child support payments, because family support or alimony is taxable to the recipient. So instead of receiving nontaxable child support, the ex-spouse will be receiving alimony, which is taxable to the payee, regardless of what the payee actually uses the money for.
Who Gets to Claim a Child as a Dependent?
Generally, in order for someone to claim a child as a dependent, he or she must provide at least 50% of the child’s support during the tax year. For couples who are still married and living together, claiming kids as dependents is usually a slam-dunk.
Things get complicated, however, when parents divorce or separate. Now, only one of you can claim the dependent exemption. (The IRS will come down hard if both of you try to claim it; they cross-reference dependents’ Social Security numbers to make sure taxpayers aren’t doing this.)
Special Rule for Parents Living Apart
If the parents lived apart at all times during the last six months of the calendar year, or if they have a written divorce decree, maintenance agreement, or separation agreement, there is a special rule that applies.
In this case, if the 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, the IRS rules assume that the custodial parent (defined as the parent who has custody of the child for the greater part of the year) should get the exemption for the dependent. However, the parties may change this presumption and allocate the exemption to the noncustodial parent if either of the following are true:
- The divorce decree or separation agreement contains a provision in which the custodial parent waives the right to claim the dependent exemption. (The rules are slightly different 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 his or her right to claim the dependent exemption, and the noncustodial parent attaches this declaration to his or her tax return. Using this form, the custodial parent can relinquish the exemption for one year, a number of years, or forever, depending on what the parties agree to.
- If you relinquish the exemption, you are also relinquishing eligibility for the child tax credit.
The IRS is very picky about Form 8332, and can (and often does) disallow the dependent exemption for the noncustodial parent if this form isn’t signed and attached to the tax return, even if the divorce decree or separation agreement allocates the exemption to the noncustodial parent. That means it’s very important for the noncustodial parent to attach a copy of this declaration to his or her return in every tax year in which he or she claims the exemption.
If the custodial parent refuses to sign Form 8332, the noncustodial parent can attach part of the divorce decree or separation agreement (the cover page, the page that discusses the exemption and the signature page) to his or her tax return to prove that he or she is entitled to the exemption. However, the IRS will accept this only if the decree or agreement doesn’t require that certain conditions be met before the noncustodial parent can claim the exemption. If there are conditions, the noncustodial parent must use Form 8332 or not get the exemption.
Rule for Unmarried Parents or Those Still Living Together
If the parents are not married, did not live apart during the last six months of the calendar year, or do not have a written document, the test for determining which parent can claim the child as a dependent is that the parent who provides more than 50% of a child’s support during the tax year can claim the child as a dependent.
Rules for Parents Who Contribute Equal Amounts of Support
If neither parent provides more than half of the child’s support for the year, things get even more complicated. For more information on how to handle this situation, see IRS Publication 504, Divorced or Separated Individuals, which you can download for free from www.irs.gov.