Be versed in IRS status of child support
In 2013, the most recent year for which data is available, the amount of child support owed in the United States was $32.9 billion, according to the U.S. Census Bureau.
Of that, $22.5 billion was received, the bureau said in a January report.
Whether you are on the paying or receiving end of child support, it’s important to know whether the money is taxable. If you make child support payments, can you write them off? If you receive payments, do they count as taxable income?
The short answer is no. Child support payments are not taxable.
The parent making payments cannot deduct the payments from his taxable income, and the parent receiving payments is not required to declare the money as income.
When it comes to claiming the child tax exemption, you cannot necessarily claim a child as your dependent for tax purposes even if you are covering most of the child’s expenses. In most cases, the custodial parent — the one who spends the most time with the child — is the one entitled to the tax credit, even if that parent does not provide more than half of the child’s financial support.
While it is possible for the non-custodial parent to claim the child tax exemption, some fairly stringent conditions apply. For one, there must be a written agreement signed by the custodial parent stating that she will not claim the child as a dependent on her taxes. Both parents must also sign an 8332 form from the IRS, and that form must be attached to the non-custodial parent’s tax return.
To avoid future conflict, the parents generally contract who claims which child and make that specification in a judgment during divorce proceedings, said attorney and accountant Matt Skarin.
Unfortunately, the IRS also does not allow parents to split the tax exemption, even in cases of joint custody. However, parents may agree to negotiate the tax exemption on a yearly basis, with one spouse claiming it one year, the other claiming it the next.
Such an arrangement will obviously impact a parent’s budget. Single parents would, therefore, benefit from adopting some specific budgeting strategies for single parents.
Whatever a couple decides, it’s important to make arrangements before the final decree of divorce to ensure that all standards have been met.