As we get closer to the end of the year, many people are starting to think about taxes. Well, at least I do. A common question I get from divorced or separated parents is whether child support is tax deductible. For many people, child support is a significant monthly financial transaction, so, naturally, they are wondering if they can receive a tax benefit for the sums paid in support. Unfortunately, I have to tell them that child support is not tax deductible for federal tax purposes. It is a non-taxable transaction.
A lot of people paying child support (usually dads) are disappointed to learn this fact about child support being non-deductible. After all, the payor often sees the support payment as a tax-free windfall to the other parent. One thing I often suggest parents do is communicate with each other to see who would get the greater tax benefit for claiming the dependency exemption for their children on their taxes. Sometimes the parents can come to an agreement that can somewhat soften the blow of a substantial child support payment by offsetting it via the dependency exemptions for the children. The custodial parent can release the exemption to the non-custodial parent by use of IRS form 8332 for the tax year in question.
Certain aspects of divorce do not always have to adversarial. It makes sense to try to find a win-win solution to maximize everyone’s after-tax income. If the parties are cooperative in allocating the dependency exemptions, they may be able to keep more of their after-tax earnings for themselves and their families. A brief consultation with your trusted tax advisor should allow you to find the win-win allocation of the dependency exemptions.