If you are paying or receiving child support pursuant to a court order or consent agreement, it is important to know the tax implications of such payments. Under the federal tax code, all income must be reported on your tax return. Until recently, spousal support was both taxable as income and deductible for the party paying support. The Tax Cuts and Jobs Act removed this tax classification of alimony, so any payments required under divorces or legal separations executed after December 31, 2018, are neither deductible (for the payor) nor reportable as income (for the payee). As this is a relatively recent legal development, you should consult with a family law attorney and/or tax attorney if you have questions about your specific situation.
Child support payments are neither taxable nor deductible. As such, the party paying support must declare the full amount of their income when filing a tax return, and cannot deduct any child support payments from the total amount. This is true regardless of how many children the parent is providing support for or how large the total support amount is.
The Importance of Defining Support
A child support obligation can arise out of a court order or a support agreement. In cases in which one party is paying both spousal and child support, it is important to separate and define the amount of each support obligation. Only amounts specifically designated as child support will qualify as child support. As such, if an agreement or order merely provides for a lump sum support amount, it will all be considered spousal support. While this will result in tax benefits for the parent paying the support, as he or she will be able to deduct the entire amount from his or her taxable income, it will leave the parent receiving the support payments at a disadvantage, due to the fact the entire amount will be taxed as income. Arguably, allowing for the entire amount of a combined support obligation to be considered spousal support is detrimental to any children provided for under the obligation as well, as they will receive a lesser amount than they would have had the child support portion of the obligation been appropriately identified, due to the taxation of the entire amount.
Family support = child support and spousal support (alimony) combined into one recurring payment; family support is now disfavored in many courts.
Claiming a Child as a Dependent on a Tax Return
While a parent cannot deduct child support payments from his or her reportable income, he or she may be able to claim the child as a dependent on his or her tax return. Only one parent can claim a child on a tax return. For married parents who reside and file taxes together, this is not an issue. If the parents of a child are unmarried and do not live together, however, they must determine which parent will claim the child as a dependent. As in most issues that arise in domestic relations cases, if the parents are able to come to a decision regarding who may claim a child as a dependent, they can draft a support agreement, and file the agreement with a court that would have jurisdiction over the matter. Additionally, a support order can state which parent will be granted the right to claim the child as a dependent on his or her tax return.
By default, the parent with whom a child lives for the majority of the time can claim that child as a dependent.
If the parents cannot come to an agreement and the support order does not dictate which parent may claim the child as a dependent, under the tax code, the parent the child resides with the majority of the time is considered the custodial parent, and the child can be claimed as a dependent on the custodial parent’s tax return. However, if the child resides with both parents equally and the non-custodial parent provides more than half of the child’s support financially, the non-custodial parent can claim the child as a dependent if the custodial parent signs a form provided by the IRS relinquishing the right to claim the child as a dependent. The non-custodial parent must then attach the completed form to his or her tax return, in order to claim the child as a dependent.