2018 note: The Tax Cuts and Jobs Act (TCJA) of late 2017 eliminates the deductibility of spousal support beginning in 2019 with new divorce agreements.
The tax implications of spousal support generally get more attention but there are some things to be aware of as regards child support and tax. Below I explain the key ways in which child support and tax relate to each other.
Child Support and Tax Considerations
1. Child support is not taxable income for the recipient nor is it tax-deductible for the payer.
2. This is in contrast to spousal support (alimony) which is taxable income for the recipient and tax-deductible for the payer.
3. Therefore, from a purely financial point of view, a payer of support is financially better off paying a dollar of spousal support than a dollar of child support. The recipient of support is better off receiving child support than spousal support.
4. The guideline child support amount in California, calculated by authorized programs such as the Dissomaster, takes taxes into account and is greatly affected by the after-tax income of the parents.
5. These programs rely on the data entered into them and there are data-entry choices you can make. The main three tax-related choices are:
- who claims the exemption for each child;
- the filing status of each parent; and
- whether each parent takes the standard deduction or itemizes their deductions.
6. Each exemption that you claim for a child on your taxes shaves about $4,000 off your taxable income. Only one parent can claim a given child in a given tax year. You can change which parent claims each child from year to year. The parent in the higher tax bracket gets greater tax savings from the exemption. Allocating the exemptions to the higher-income parent usually results in greater guideline child support. Even when you aren’t going with the guideline child support amount, you should specify in your divorce settlement who is going to claim the exemption(s) for the child(ren). The parent who claims the exemption for a child can also usually claim the $1,000 child tax credit, although the credit starts to phase out at higher incomes.
7. When you are married, couples use either the Married Filing Jointly or Married Filing Separately filing status. When you are divorced, each parent must use either the Single or Head of Household filing status. Only one parent can use the Head of Household filing status in a given tax year. A parent can only file as Head of Household if his/her timeshare with the children is at least 50% and if the parent pays at least 50% of the cost of keeping up a home. For a given parent, filing as Head of Household results in paying less tax than filing as Single.
8. It’s usually homeowners who itemize their deductions since the mortgage interest and property tax paid push them over the threshold of the standard deduction amount. In 2016, the standard deduction amount is $6,300 for Single and $9,300 for Head of Household. If a parent itemizes, they will pay less tax, which the child support guideline programs interpret as making more income available to pay child support (if they are the payer) or less need for child support (if they are the recipient).
There is an infrequently used way to combine child support and spousal support into a single payment called “family support,” the entirety of which can be tax deductible. It’s not worthwhile for most couples.