If you pay child support, it is not tax deductible to you nor is it taxable to your recipient spouse. However, when calculating child support, it is important to consider who will be claiming your children as dependents for tax purposes and also to calculate the economic benefit a recipient party will receive if he/she is eligible for head of household status.
If you are a payor, careful consideration of the tax benefits available to the recipient parent can assist you in calculating the most equitable outcome.
Generally, it is recognized that there is a significant financial benefit to the ability to claim a child as a dependent for income tax purposes. Child support calculation formulas in most states take into consideration whether or not the payor is allowed to claim a child as a dependent for tax purposes.
In Kansas, for example, the parties may either choose to alternate claiming a child as a dependent or, in the event that only one party will claim the child as a dependent, choose to make an adjustment on the child support worksheet to reflect the financial benefit the claiming party will receive. It is my opinion that it is financially more beneficial for the payor to opt to alternate the deduction rather than receive an adjustment on his/her child support worksheet. A child support adjustment will only benefit the payor so long as child support is paid, while claiming the deduction may be a financial benefit that can be reaped by a parent several years after a child’s emancipation. When calculating child support, you and your attorney should also keep in mind that there is a financial benefit associated with the ability to claim head of household status.
If a custodial parent utilizes the standard deduction and files as head of household, the custodial parent may receive a federal and/or state tax benefit he/she would not otherwise be able to realize absent custody of the child. As to daycare, keep in mind that if your support calculation includes daycare to be paid by the recipient parent, the amount should be reduced by the anticipated tax credit the recipient parent will receive for child care on a federal and state level. Current tax law should be reviewed for the applicable amounts. Remember that the IRS is not bound by your divorce decree in its enforcement of the tax code. If you have agreed to alternate your child as a dependent and your ex-spouse claims the child the same year you do despite the provisions of your decree, your returns will be flagged. The party who meets IRS guidelines for dependency exemptions will be permitted to claim the child and the other party will be required to re-file.
If you are the aggrieved party forced to re-file, you may have an action in state court but you do not have any recourse with the IRS. To avoid any problems in this regard, I recommend that non-custodial clients obtain an executed Internal Revenue Form 8332 from the custodial parent. Form 8332 is a release of the dependency exemption from the custodial parent to the non-custodial parent. If you are negotiating a divorce settlement agreement, you should include a provision requiring the timely execution and exchange of this form as necessary. In short, every line of your child support worksheet should be scrutinized from a tax perspective. Many tax adjustments are discretionary with the Court. Do not expect the recipient parent or the Court to do you any favors. While this article attempts to touch upon common tax considerations to make during child support negotiations, it is by no means exhaustive. Please keep in mind that advice from your divorce attorney can not replace the advice given to you by your tax accountant. While your divorce attorney should help you remain mindful of the tax ramifications of all of your divorce related transactions, you should always seek the individual advice of an accounting professional.
Jill Rauk Daugherty is the Managing Attorney in the Overland Park, Kansas office of Cordell & Cordell, PC.
