Many single parents struggle with misconceptions about child support payments and taxes. Common questions that parents receiving or paying child support may have include how their taxes will be impacted by child support payments, who gets to claim the children on their taxes, or whether child support is taxable or deductible.
While factors determining how much tax you will pay will vary for each individual and their larger tax picture, the breakdown below in this article will address the intricacies of how child support payments impact your tax returns.
Are Child Support Payments That I Receive Taxable?
Parents receiving child support often ask if they will pay more taxes because they receive child support. It is essential for parents receiving child support to know whether the money they are receiving from child support incurs taxes or not.
In a word, the answer is no. The U.S. government does not consider child support as part of the regular income of the parent receiving child support because it is collected on behalf of his or her kids. This classifies as separate from earned income in technical terms under the ambit of income tax laws.
Can I write off my child support payments on my taxes?
The other side is that the party paying child support cannot write off the payments on his or her taxes. This is because the IRS considers it earned income for the payer.
Even though the payer has to pay tax on child support payments, financial support in the form of child support is important to the well-being of your children. The IRS taxes the payer of child support in the same way it taxes any other non-deductible expense you pay for your child’s needs.
Can I Claim My Kids as Dependents on My Tax Return?
To reduce the tax burden or claim tax incentives, the payer of child support might consider claiming their children as dependents before filing tax returns. If this is the case, the parent should fulfill the requirements of the IRS for qualifying children as dependents.
It is important to note that a child may only be claimed as a dependent on one return per tax year. Both parents cannot claim a child as a dependent on their separate tax returns. An individual may be dependent on only one taxpayer for a tax year.
However, in cases where parents disagree on a plan to use tax exemptions for dependent children, the court may intervene and decide on such a plan, which accounts for the share of the total income of each parent for child support purposes.
The parent may be able to claim the child as a dependent and file income tax with the Head of Household as long as the child falls under age 19 (as nonstudents) or 24 (as full-time college students) under the qualifying child test. They must also meet other qualifying relative tests as per Form 8332 (Dept. of Treasury, IRS). If a child is permanently and totally disabled, there is no age limit under the “qualifying relative test”.
Claiming a child as a dependent makes you eligible for a Child and Dependent Care Tax Credit as long as the income of the parent paying for child support falls below the benefit threshold. The credit was worth up to $2,000 per eligible child under the original Child Tax Credit before 2021. After changes in the Child Tax Credit in 2021, the Child Tax Credit was revised to $3,000 per qualifying child ages 6 through 17.
Which Parent Can Claim a Child as a Dependent on Taxes?
In most cases, a custodial parent can claim a tax dependent. However, a non-custodial parent can also file a claim to show the child as a dependent if a signed and written document exists from the custodial parent.
In such a contract, the custodial parent must clearly state the year and conditions under which non-custodial parents have the right to claim children as dependents for paying support.
A Word From Miod and Company
Parents who receive and pay child support must know how child support impacts their bottom line. Parents receiving child support are not taxed, while parents paying child support are taxed. The parent paying child support or the non-custodial parent can get tax benefits only if that parent has a signed and written contract with the custodial parent that allows the non-custodial parent to claim the child as a dependent.
While we’ve touched on a few common questions asked about child support and taxes, there is a multitude of misconceptions and details to understand. A consultation with a certified public accountant (CPA) can resolve the doubts of parents seeking assistance about a specific tax situation and can inform you about your larger financial picture.
Here at Miod and Company, we are here to help! The CPAs at Miod can help you navigate your financial life and achieve your economic goals.
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