The IRS does not make any allowances for people going through the pain of divorce and they expect you to file your tax return correctly regardless!
Come April, you are still expected to file on time, using the right forms, and declaring all taxable income – but does that include child support?
Most parents in Colorado are aware that during a divorce, the issue of child support has significant implications on their finances.
However, the tax ramifications of such agreements are often either overlooked completely or misunderstood.
Tax can have major consequences for the recipient and the payor of child support. It can also affect other key aspects of the divorce, as you will see below.
It is advisable to know your rights and to get clear on how child support may affect you so that there are no nasty surprises come tax time.
What are the tax implications for child support?
Your marital status as of December 31st will determine your eligibility to file either jointly or “married separate” if your divorce has not yet been finalized.
If your divorce is completed before or on December 31st, neither you nor your ex-spouse can file your tax return jointly (or as married filing separately) unless you have remarried during that time. Therefore each party would file as a single filer.
Note that child support payments are treated as an entirely different matter to spousal maintenance – one is not considered as a “part” of the other and different tax rules apply.
Child support is not tax-deductible. This means that the payor of child support will not receive a tax break.
Also, the recipient of the child support will not incur any taxes as it is not considered income. There is no need to declare it as such on tax returns.
However, certain deductions related to the children can be claimed, depending on circumstances.
Dependency exemptions/tax credits
Exemptions and credits may apply for the dependency of minor children. By statute, these are allocated by the court to each parent according to their contributions to the cost of raising a child – providing there is no other legal agreement between the two parties.
This usually means allocating the exemptions proportionate to income.
Example: If spouse A makes $50,000 per year and Spouse B makes $100,000 per year, Spouse B will normally be able to claim the dependency exemption for the child for two out of every three years.
You will need a court order to specify this before it becomes enforceable. The IRS rules are different when it comes to claiming children on a tax return, so until there is a court order from a Colorado judge, you would need to follow the IRS guidelines.
Note that the payor of child support must be up-to-date with payments to claim the dependency exemption or tax credit. This generally takes cooperation from both parties to arrange.
For the non-custodial parent to claim the exemption, the other parent must fill out IRS Form 8332, informing the IRS that the custodial parent is waiving the right for the year in question.
Form 8332 also allows the ex-spouse to claim other tax benefits, such as the Child Tax Credit.
*Note that as the federal tax law changes, so does the Colorado statutes about claiming children. For example what used to be known as dependency exemptions have now been mostly converted to credits. This could change again when Congress changes the tax code.
Head of Household and other considerations
You and your attorney also need to address head of household claim, childcare and higher education deductions, etc. There are also other tax implications, such as the mortgage interest deduction, that may not be related to children but still need to be part of an agreement or court order so that you tax filing in the future goes smoothly.
It is also vital to address past taxes if you and your partner filed jointly. What if you get audited post-divorce for a past tax return? What if there are outstanding late fees due? An attorney can help you think ahead, but also address the past.
Tax and divorce
For couples going through a divorce, some of the costs incurred in the process may be tax-deductible.
These include:
- Advice on tax
- Fees paid for appraisals
- Fees paid for actuaries
- Accounting fees
However, note that divorce attorney fees are not tax-deductible.
401K penalty-free withdrawal
The 401K penalty-free withdrawal is available if the court orders you to pay child support (or maintenance) to an ex-spouse or dependent child.
Child support vs maintenance payments
If you receive child support, there is no need to include this in the calculation for your total gross income if you are totaling up to see whether you need to file a tax return.
Again, these payments are not considered taxable income.
Previously, spousal support (or “spousal maintenance” as it is usually referred to in Colorado) was treated very differently by the IRS.
Spousal maintenance income used to be considered taxable and was reported on IRS Form 1040 if:
- The maintenance payment was made by cash, check, money order, etc.
- The instrument did not designate the payments as “not maintenance”
- You and your spouse were not members of the same household at the time the payments were made
For the payor of spousal maintenance, the amount also used to deductible and could be claimed in the year paid on the IRS Form 1040.
However, all that changed with the passing of the Tax Cuts and Jobs Act.
Under this act, passed at the end of 2018, alimony was no longer regarded as tax-deductible for the payor and no longer counted as taxable income by the recipient. This could change again so its important to have an attorney understand the tax consequences of maintenance.
Get help with child support
Divorce and tax are no simple matters.
The issues become more complex with the increasing use of 50/50 visitation and custody arrangements. For tax purposes, the question of which parent is considered the custodial parent is not easily answered.
If you are in this position or are facing other complexities with child support, seek professional advice on how your tax situation is affected.
A divorce lawyer and, if necessary, a tax attorney or tax accountant should be able to assist. Remember, the wrong decisions could end up costing you a lot in unnecessary tax.
If you’re experiencing difficulties with a child support agreement, the divorce lawyers at Colorado Legal Group can help. Start with a free case evaluation. Call Colorado Legal Group at 720.594.7360.