Parents who pay or receive child support often ask how these payments will affect their taxes, especially when it comes to claiming Child Tax Credits or Child and Dependent Care Credits.
Most assume that child support payments should allow the paying parent to claim the child as a dependent on their tax return. Those receiving child support may worry about losing potential tax deductions. However, the tax system regarding child support isn’t that straightforward.
Which Parent Gets the Child Tax Benefit?
The IRS has clear rules for determining which parent can claim a child, and child support plays no role in this decision. Typically, the parent with primary physical custody—that is, the parent the child lives with for most of the year—is the one who can claim the child as a dependent. Typically, the parent with primary physical custody – that is, the parent the child lives with for most of the year – is the one who can claim the child as a dependent. The custodial parent can also claim related tax credits, including the Child Tax Credit.
Does the Parent Receiving Child Support Also Get the Tax Breaks?
Shouldn’t the parent paying child support get to claim the child as a dependent on tax returns? It seems like double-dipping when the custodial parent is receiving child support payments and still gets to claim the child as a dependent.
However, the primary goal of child support is not to assign specific duties or obligations for tax purposes but to ensure both parents share the financial responsibility of raising their children. The law presumes that both parents contribute to child-rearing, even if one parent has primary custody.
While the paying parent may contribute financially to the child's well-being, the custodial parent often bears the day-to-day responsibility for the child's care, so they are generally entitled to the tax deduction and credits associated with the child.
Child Support Is Not Taxable or Deductible
It's important to remember that child support is not considered taxable income for the recipient or deductible for the payer. This means that paying child support does not directly impact a parent’s tax liability regarding taxable income.
The Impact of Income on Tax Deductions
Though child support does not directly impact taxes, how tax benefits are distributed can have a significant financial effect, particularly if one parent earns substantially more than the other.
In many cases, the lower-income parent receives child support. In these situations, the tax deduction for claiming the child might not benefit the recipient parent as it would the paying, higher-income parent.
How Non-Custodial Parent Can Get Child Tax Benefit
While the custodial parent has the right to claim the child tax benefit, there are ways to transfer the right to claim the child to the non-custodial parent and maximize the tax savings for both parents. The IRS provides a mechanism for this through Form 8332, allowing the custodial parent to relinquish their right to claim the child as a dependent in favor of the noncustodial parent.
Allowing the non-custodial parent to claim the child may seem counterintuitive, especially if the custodial parent is entitled to the tax benefits by default. However, this decision may come with benefits.
For instance, the noncustodial parent may be in a higher tax bracket, meaning that the tax deduction could be worth more than it would be to the custodial parent. The custodial parent may agree to give the non-custodial parent the right to claim the child in exchange for an increase in child support payments or other financial adjustments.
The Child and Dependent Care Tax Credit
On the flip side, there are situations in which the custodial parent might not want to relinquish the right to claim the child. If the custodial parent has a lower income, they might be eligible for additional tax credits, such as the Child and Dependent Care Credit. This credit helps counteract the costs of childcare, such as daycare or after-school care and can provide a significant benefit to parents who are working or attending school.
In these cases, the custodial parent may want to claim the child as a dependent to take advantage of these credits, which could help offset some of the financial burdens surrounding childcare costs. If the custodial parent is considering relinquishing the dependent claim, they should carefully weigh the potential impact of losing this credit against any additional child support payments they may receive.
While child support payments themselves don’t directly impact your taxes, how you and your ex-spouse structure your custody and support arrangements can have significant tax implications. It’s crucial for both parents to communicate and explore options for maximizing their tax benefits, whether that involves negotiating who claims the child as a dependent or working out an arrangement for additional financial support.
Because tax laws surrounding child support and dependents can be nuanced, it’s always a good idea to consult a knowledgeable family law attorney and a tax professional who can help you discover the best approach for your specific circumstances.