CHILD SUPPORT AND TAXES: IS CHILD SUPPORT CONSIDERED INCOME FOR THE CUSTODIAL PARENT AND THEREFORE TAXABLE?

During the divorce process in California, parents need to agree on a visitation plan for their children, i.e. how much time the children will spend with each parent, as well the amount of child support to be paid by one or both parents. California courts want to ensure that a child’s basic needs, such as housing, food and clothing, education expenses, medical expenses, and any other reasonable expenses are covered. Usually, child support is paid to the parent with whom the child lives most of the time and child support amounts are not arbitrary. Instead, they are based on specific California Child Support Guidelines considering both parents’ incomes and the percentage of time children spend with each parent.

Federal Tax Regulations

Federal tax regulations are very clear when it comes to child support and taxes. For federal income tax purposes, child support is always tax-free. This means that neither the custodial parent who receives child support payments, nor the child, owes any taxes on those payments. As for the non-custodial parent who makes those child support payments, they are not classified as tax-deductible. One very important consideration for custodial parents is to make sure that those monthly payments are specifically designated as “child support” in the final divorce agreement, also known as marital separation agreement (MSA). Child support payments should be completely separated from spousal support payments and not lumped together as “family support”. This is an important step to follow for one major reason: while child support is tax-deductible, spousal support is considered income and taxable. The final agreement between parents needs to be very clear on identifying which payments are for child support and which ones are for spousal support, so that custodial parents do not experience unnecessary tax burdens.

What Parent Will Claim the Children

An additional tax consideration that parents must agree on in their divorce agreement is which parent will claim the children as dependents on their tax returns. For a parent to be eligible for that exemption, he/she needs to provide at least 50% of the children's financial support during the tax year (this includes the amount the money spent on housing, utilities, food, clothing, etc). Only one of the parents can claim this dependent exemption and the IRS does check that this rule is followed so both parents do not claim it at the same time. Therefore, it is essential for parents to spell out in their final divorce agreement which parent will claim the dependent exemption. Parents who share 50/50 custody sometimes agree to alternate which year they will claim the dependent exemption. Individual situations can be complicated so it wise to discuss these details with either a tax accountant or a competent divorce mediator before deciding which tax arrangement will be best for each of the two households.

About A Fair Way Mediation

A Fair Way Mediation Center offers a relaxed, compassionate atmosphere in an informal setting that encourages a calm and objective approach. This is a safe space that avoids the stress and embarrassment that courtroom procedures can inject into any divorce or separation. All couples are welcome, including traditional or same sex families.

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