The combination of taxes and divorce can add another layer of complexity to an already complicated situation. Divorce affects taxes in different ways. This is especially true for divorced couples with children. Read how divorce affects taxes; especially if you have children.
Arguably, alimony and child support are both forms of income, but the IRS tends to treat them very differently. Generally speaking, alimony is taxable for the recipient and tax-deductible for the person paying it. That’s not true of child support. In fact, the IRS does not require that child support be reported as income, so the parent receiving child support will not have to declare it as taxable income. Meanwhile, the person paying child support cannot use these payments as a tax deduction. However, if alimony is scheduled to end within six months of a child’s 18th or 21st birthday, then the IRS may view it as child support.
An exemption reduces your taxable income, and you may receive an exemption for each person you claim as a dependent. Many couples specify who will be claiming a child on taxes in their divorce agreements. In the past, if the parent who was awarded the least amount of time-sharing was awarded the right to claim a child as a dependent in their divorce agreement, they could simply refer to the agreement to support their claim. Now, it may be necessary to secure and sign an IRS Form 8332, which is entitled “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent”. However, what if your divorce agreement is silent about dependency? If the agreement doesn’t address the issue, then the parent with the majority of time-sharing awarded typically receives the tax credit. If, for any reason, the parent does not qualify for the tax credit, or decides to opt out, they may agree to allow the other parent to claim the credit by signing an IRS Form 8332.
The Child Tax Credit
A tax credit reduces your tax liability, and the Child Tax Credit allows parents with incomes below certain amounts to claim a credit for each qualifying child who is under the age of 17. If you meet the requirements, you can claim both the exemption for dependency and the tax credit, but you cannot claim the tax credit for a child who is not listed as one of your dependents.
The Child Care Credit
The Child and Dependent Care Credit is designed to help cover the costs of child care. Even if the parent with less time-sharing claims the child as a dependent for tax purposes, they won’t qualify for this particular credit. However, if you are a parent with the majority of time-sharing, you may be able to claim this credit regardless of whether the child is your dependent. The requirements for this credit are specific, so before claiming it, consult with a tax professional.
If you are looking for additional information about taxes and divorce, we’ve also written another article about understanding the different ways to file taxes after a divorce.
Tax codes are continually changing. If you have detailed questions about taxes and divorce, we recommend that you also consult with a qualified tax professional. If you are facing legal issues relating to divorce, child support or child custody, Eric C. Cheshire offers over 29 years of experience, dedicated exclusively to divorce and family law. Contact us today at 561-655-8844 to schedule a consultation.