Navigating Tax Issues Related to Child Support
When it comes to child support payments, there are some key tax issues that both the payer and the recipient need to understand. The Internal Revenue Service (IRS) views this exchange of money differently than most other financial transactions, and you should be sure to carefully consider how you refer to child support in your agreement.
First, child support payments are free of tax for both parties involved in the transaction. However, these the payer cannot deduct them on his or her tax return.
Additionally, it’s important to note that to be legally considered child support, payments must be clearly referred to as “child support” in the agreement or order you’ve established. If, for example, the agreement combines alimony and child support (often referring to it as “family support”), the recipient may have to pay taxes on it.
Claiming dependents on your tax return
Another common issue divorced or separated parents need to address is who will get to claim the kids as dependents on their tax returns. Only one parent can do this for each tax year — and the IRS can be tough on parents if they both try to claim the same dependents in the same year.
One way many divorce or separated parents resolve this challenge is to alternate the years in which they are able to claim their kids as dependents. This is generally the way courts will divide tax dependency exemptions because child support is calculated in such a way that both parties are financially contributing to the upbringing of the children. It is often included in the order that the person paying the child support must be current with their child support payments to claim the tax exemption for their assigned year.
If you have further questions about child support and how it could impact your taxes, contact a knowledgeable Minnesota divorce attorney with Appelhof, Pfeifer & Hart, P.A.