Children and Taxes Post-Divorce: The Basics
Child support payments are never taxable nor deductible. There are, however, several other tax implications that take effect upon separation that deal with children. Arguably the most important child related tax consideration is the dependency exemption. The exemption, similar to a tax deduction in operation, reduces a person’s taxable income by a set amount. Parents can either agree who is entitled to take this exemption, or the IRS rules will allow the custodial parent to take the exemption. The custodial parent is the parent who has custody for a greater portion of the calendar year. Whichever parent claims the dependency exemption is also entitled to claim the child tax credit. The tax credit allows a parent to reduce federal income tax by as much as $1,000 per child. The amount of the credit is dependent on the applicable modified adjusted gross income.
For married couples filing separate returns, the amount of the credit begins to decrease (or phase out) if your income is $55,000, and for divorced parents the threshold is $75,000. The only parent who may claim this tax credit is the parent who also claims the dependency exemption; the two cannot be split. Not all child-related tax credits are tied to the dependency exemption. For instance, the child and dependent care credit, which gives a parent credit for child for a portion of childcare expenses, is not tied to the dependency exemption. There is also a medical expense deduction applicable to parents who contribute more than 7.5% of their income to their child’s medical expenses, which is not tied to the dependency exemption. A parent may claim either of these, if certain requirements are met, even if they do not claim the child as a dependent.