If you pay or receive child support through a child support order, you should know that payment or receipt of the money does not affect your taxes directly. Child support is not deductible by the paying parent. Neither is it considered taxable income for the receiving parent, so you don’t have to pay taxes on it.
There are other tax issues related to the support of your children that do come up, however.
Claiming your children as dependents
Whether you can claim one or more of your kids as a dependent for federal tax purposes depends in part on what your custody agreement says. For example, your custody agreement might have the parents claim the kids as dependents in alternating years.
If your custody agreement doesn’t address this issue, who can claim the kids as dependents depends on whether you are considered the “custodial parent” or the “noncustodial parent.” The custodial parent is simply the one who has the children in their care for the majority of the overnights in any given year.
Absent a custody agreement saying otherwise, the IRS assumes that the custodial parent should claim all of the children as dependents for federal tax purposes. For the noncustodial parent to claim the children as dependents, the following statements must all be true:
- The parents are divorced or legally separated under a divorce decree or written separation agreement, and
- They lived apart at all times during the last six months of the year, regardless of whether they were married, and
- Each child in question received more than half of his or her support from the parents, and
- Each child in question has been in the custody of one or both parents for more than half of the year
In order to claim the affected children as dependents, the noncustodial parent must have the custodial parent sign IRS Form 8332 and attach it to his or her tax return.
The Child Tax Credit and The Earned Income Credit
The same rule as above applies in claiming the Child Tax Credit, which applies to children who were 17 or younger during the tax year. If you are the parent claiming the child as a dependent, you also claim the Child Tax Credit for that child.
The Earned Income Credit (EIC) is different. This is a refundable tax credit for low- and moderate-income taxpayers. In most cases, the custodial parent gets this tax credit, although there are some exceptions.
If you are divorcing and have children, you will need to consider who gets to deduct the children as dependents for federal tax purposes. This can be negotiated and included in your custody order. It’s important to have a knowledgeable, compassionate attorney help you with these issues.