Like it or not, our relationships carry a legal status. When you get a divorce, you don't just move out of the house and start over: your legal status is also redefined.
When parents divorce, their relationships don't end. While you may no longer be connected, legally, to your ex-spouse, you are co-parents forever. And, as co-parents, legal orders regarding custody and child support will impact every aspect of your life - including your taxes.
As you settle into your new life as a divorcee - or as you negotiate custody and child support with an ex-spouse - keep the following in mind:
Who will claim your children as dependents? And, how are child support payments taxed?
Basic rules of dependency
Regardless of your settlement agreement, only one parent can claim dependency - which has notable tax advantages through deductions and credits. Whichever parent provides primary residency is usually the one who will claim the children as dependents. If both parents share duties equally it gets more complicated. For example, if one parent provides more support than the other, then he or she might make the claim.
Regardless of where children spend the majority of their time, parents are free to decide between themselves which one of them will claim their children as dependents.
Child support and taxation
It takes a lot of money to raise a child. This means substantial payments to support your child each month and, for the primary caregiver, substantial checks coming in.
However, there are no tax benefits or consequences to paying or receiving child support. The IRS does not tax child support payments as income to the primary guardian - the parent receiving the child support payments. Similarly, the parent paying child support cannot deduct these payments from his/her gross income.
Another post-divorce adjustment
Most tax decisions surrounding child support rely on who is the primary custodian and caregiver. However, each situation is unique because no two families have the same dynamics at play.
There is a lot to learn as you readjust your family structure after a divorce. If parents have changing roles, disproportionate incomes or complex settlement agreements, an attorney who understand both family and tax law can help guide you through the tax arrangements of your new family structure.