Tax & Financial Considerations

Five Considerations For Child Support and Tax Returns

Interpreting tax laws and making appropriate calculations can be a complex and confusing issue for many people, especially when two households are maintained and there are questions of dependency, allowable deductions, and payments exchanged involving child support and spousal maintenance (alimony).  The Children’s Rights Council makes no claim of any expertise in tax law or financial reporting in offering any information on this website.  Dollar Sign on CRC Child Support Tax Considerations PageWith that being stated, there are some important considerations parents should understand when first arranging for child support and subsequently filing annual tax returns:

1. Financial Child Support is the condition where one parent is required to contribute to the support of child(ren) through the agency of the other parent or guardian.  In this manner, regulations under the Internal Revenue Service interpret child support as a normal part of parenting financial responsibilities.  Child Support payments are therefore considered a necessity for a parent’s support of their own offspring (after-tax dollars) and not taxable to the person who receives it, nor tax deductible to the person who pays it.  IRS Publication 501, Exemptions, Standard Deduction, and Filing Information contains more information specific to this ruling.

2. Alimony (Spousal Maintenance) is treated very differently and should not be confused with financial child support. With respect to taxation, alimony is a payment to or for a spouse or former spouse under a court ordered divorce or separation agreement.  It is considered a taxable gross income and therefore is treated as income to the receiving spouse, and may be deducted from the income of the paying spouse as pre-tax dollars.  In the event parents have dramatically different incomes, there may be some tax and financial advantages to both parents that are not available by paying and collecting child support. 

For many high earning non-custodial parents paying family support in the form of alimony instead of child support may significantly soften the financial effects by reducing the total amount of taxable income at the end of the year.  That means a dollar of alimony may in affect actually cost the paying non-custodial parent $.60 whereas a dollar of child support could cost as much as $1.40, assuming the paying parent falls into a 40% income bracket for taxes. For lower wage earning custodial parents, alimony is reportable is income and thus may be used to help better qualify for a larger home or car loan, and other important lifestyle changes.  The additional reported income may be offset by available child tax credits and other relevant deductions.  In these situations everyone may realize a much improved financial benefit (except the IRS) and likely contribute to more cooperation between parents in the best interest of their child(ren).  It is important to note the IRS does not usually recognize voluntary spousal payments made under a divorce or separation agreement which have not been approved by the Court. For more information refer to IRS publication 504, Divorced or Separated Individuals.

3. Pendente Lite (Temporary Support) is similar to other forms of periodic installments of spousal maintenance in that it is taxable to the recipient and deductible by the paying spouse under IRS rules.  As a result, a higher earning parent may be financially better off supporting the custodial parent partly in the form of an alimony payment instead of child support because alimony is paid in pre-tax dollars and child support is paid in after-tax dollars.

4. Bankruptcy under the rules of the Federal bankruptcy code, usually consider child support or alimony as a non-dischargeable obligation.  That is, regardless under which chapter of the code bankruptcy may be filed, a person may not escape their financial requirement to make ordered payments to the recipient parent. Several bankruptcy courts have also ruled that birthing expenses to be paid to a debtor’s child’s mother, while not being paid to a spouse, former spouse or child, are still “in the nature of support” and can’t be discharged. These courts have concluded that the amounts to be paid to the child’s mother are debts actually owed to the child and that the nature of the debt is far more important than to whom the debt is to be paid.

5. Dependency Tax Exemptions and the rules for claiming child(ren) as a dependency exemption for tax reporting are contained in the Federal tax laws.  Various state domestic courts however consider the tax exemption differently when evaluating the entire spectrum of financial responsibilities.  In other states much greater flexibility is allowed, encouraging parents to set their own agreements for who will file for the tax deductions. When the non-custodial parent is awarded the tax exemption, it is imperative the custodial parent evidences their consent in writing before the court.  Similarly, the custodial parent should be protected by language requiring the non-custodial parent is current on the child support payments in the year claimed.