There are some things to be aware of as regards children and tax when it comes to divorce. Below I summarize the main areas. See also this IRS article (and others with links below) for further information. As a Certified Divorce Financial Analyst and a divorce mediator, I can help you understand and come up with solutions for the tax-related matters associated with your divorce or separation.
Children and Tax Considerations
1. Child support is not taxable income for the recipient nor is it tax-deductible for the payer.
2. The guideline child support amount in California, calculated by authorized programs such as the Dissomaster, calculates your expected income taxes and is greatly affected by the after-tax income of the parents.
3. 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 each child as a dependent;
- the filing status of each parent; and
- whether each parent takes the standard deduction or itemizes their deductions.
4. Prior to 2018, you could claim an exemption for each child on your federal taxes which shaved about $4,000 off your taxable income. The 2018 Tax Cuts and Jobs Act eliminated these exemptions.
Dependents and Filing Status
5. Only one parent can claim a given child as a dependent in a given tax year. You can change which parent claims each child from year to year. You should specify in your divorce settlement document who is going to claim the child(ren) as dependent(s).
6. Child tax credit. The parent who claims a child as a dependent can usually claim the child tax credit. The credit is worth $2,000 in reduced tax per child for children 16 years old and younger. For children who are 17 or 18 or in college up through age 24, the credit is $500 per child. The credit starts to phase out at higher incomes.
7. Filing status. 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. The Single filing status allows you to exclude income of about $12,000 from taxation. The Head of Household filing status allows you to exclude income of about $18,000 from taxation.
There are requirements for being able to claim the Head of Household filing status. Only one parent can use the status in a given tax year for a given child. A parent can only file as Head of Household if his/her timeshare with the child is at least 50% and if the parent pays at least 50% of the cost of keeping up a home. If there are two or more children, each parent could possibly use the Head of Household filing status if the requirements are met. It’s often wise to specify in your divorce settlement document who will use what filing status for the year of the divorce and for subsequent years.
8. Child care credit. If you have earned income and pay a third party for non-reimbursed child care to enable you to work or look for work, you may qualify for the child care credit. This can amount to as much as $3,000 for one child or $6,000 for two or more children.
There used to be an infrequently used way to combine child support and spousal support into a single payment called “family support,” the entirety of which could then be tax deductible. It’s no longer available since spousal support is no longer deductible.