Child Support Payments
Unlike the alimony payments that are deductible by the paying spouse, and taxable as income to the receiving spouse, the IRS has mandated that child support payments are never deductible and taxable.
The dependency exemption reduces the taxable income of the parent claiming the exemption by a specific amount. The parents have the option to come to an agreement regarding who can claim the exemption. Parents cannot both claim the exemption in the same year and split the exemption. In the event the parents are unable to come to an agreement on who can claim the exemption, the parents have the following options:
- Follow IRS guidelines on which parent may claim the dependency exemption after separation;
- Alternate which year each parent can take the exemption;
- If there is more than one child, allow each parent to claim one of the children.
If parents choose to follow the IRS guidelines on which parent may claim the dependency exemption after separation, the parent eligible to claim the children must be the “custodial parent.” The custodial parent is defined as the parent who has custody for the greater portion of the calendar year. The determination factors may vary:
- If this number is identical, the parent with the higher income is permitted to claim the deduction);
- If one parent works nights, the number of days that parent has custody will be the number used in the calculation.
IRS form 8332 must be signed by the custodial parent and submitted by the non-custodial parent with their tax return where the custodial parent is allowing the non-custodial parent to claim the deduction. If the custodial parent permits the non-custodial parent to claim the deduction for future years, a copy of the original 8332 form must be submitted with each subsequent year’s return.
TIP: If you anticipate a dispute regarding who will qualify as a custodial parent, document the nights that the children resides with that parent in a calendar.
Child Tax Credit
The Child Tax Credit (CTC) is only available to the parent who claims the dependency exemption. This CTC allows a parent to reduce federal income tax by as much as $1,000 per child dependent upon the applicable modified adjusted gross income (MAGI).
- Married Couples (filing separately): MAGI of at least $55,000 = CTC is <$1,000
- Divorced Couples (filing separately): MAGI of at least $75,000 = CTC is <$1,000
TIP: Since the dependency exemption and the child tax credit cannot be separated, be sure to take this limitation into consideration when negotiating which parent will be able to claim the dependency exemption.
Child and Dependency Care Credit
The Child and Dependency Care Credit allows a parent to get credit for a portion of childcare expenses necessary to allow the parent to be employed.
NOTE: The custodial parent is entitled to claim this credit even if the noncustodial parent is permitted to claim the dependency exemption, unlike the CTC, which is restricted to the parent claiming the dependency exemption.
Medical Expenses Paid on Behalf of a Child
Any parent that spends more than 7.5% of that parent’s adjusted gross income, despite whether or not they claim the dependency exemption, for medical expenses on behalf of a child may claim a deduction on medical expenses.
Medical expenses include but are not limited to: