Child Tax Deductions

Child Tax Deductions in a Divorce

Related to child support, you will also need to decide who will claim the children as dependents on their income tax returns.  You cannot both claim the same child in the same year.  Who is awarded the tax exemption is not clearly defined by the law.  Rather, the relevant statutes say that the award should be made on a case by case basis, and give different factors to take into account.  The first is that whoever claims the children must realize some sort of tax benefit by doing so.  So if mom takes a year off work, she has no income, and she shouldn’t claim the kids on her taxes, because she won’t get a deduction for doing so.  Dad should claim the kids for that year so that somebody can get a tax break.  If Mom decides to go back to work the next year, then she can claim some of the kids in that year.  Other factors may include who provides the most support to the children (courts tend to put less weight on this than you might think) and maximizing the overall tax benefit received by both parties (courts tend to put a lot of weight on this factor, figuring that one way or another the benefit gets to the kids).

The tax deduction is not based on child support. (Dad doesn’t automatically get the deduction just because he is paying child support, since the child support payments are only his share of the children’s expenses.  Mom is expected to contribute as well, so they are both eligible for the deduction.)  Keep in mind though that if the person paying child support gets behind, they are ineligible to claim the deductions.  So if Dad were to miss his December 2015 child support payment, he wouldn’t be allowed to claim the children on his 2015 taxes.  However, if he makes all his 2016 child support payments (even if he hasn’t caught up from 2015), he would be allowed to claim the children on his taxes for 2016 (assuming that the divorce decree gives him that right).  The idea is to give parents an incentive to at least keep current on their obligations, even if they haven’t quite caught up on previously owing child support.

What about back Child Support?

Bear in mind as well that, if there is an ORS case open, the State of Utah can (and almost always will) intercept a tax refund to put towards back child support.  So let’s say that Dad is ordered to pay child support of $100 per month starting in July of 2014.  He has a tough time making the payments at first, and misses the first six months.  Mom goes to ORS for help, and they open a case.  Dad owes $600 to mom for child support in 2014, and won’t be allowed to claim the kids as dependents on his 2014 taxes.  Because he can’t claim the kids as dependents, he misses out on a refund for 2014.

Starting in January of 2015, Dad gets smart with his budget, cuts some expenses, and is able to make every monthly payment of $100 in 2015, but can’t quite find the money to pay off the $600 that he still owes from 2014.  Since he’s current for 2015 (and because the divorce decree allows it) he claims the kids on his 2015 taxes and the IRS sends him a refund of $600.  But since he’s behind on his child support, ORS intercepts that check and sends it to mom.  So even though he was allowed to claim the kids on his taxes, he didn’t actually get the refund.  He did, however, get his back child support paid off, and he can now look forward to many years of future tax refunds free from ORS interference.

What are some common arrangements for dividing up the tax deduction?

One common arrangement is to claim the children in alternate years.  So if you have two kids, mom will claim both of them in tax years ending in an odd number, and Dad will claim both of them in tax years ending in an even number.  This arrangement has the virtue of simplicity and predictability.  It also means that mom and Dad never really have to communicate about the tax deduction, so it can be a good solution in divorces or custody arrangements where there is already a lot of conflict or difficulty communicating, and you are trying to minimize the potential for future conflict.

Another common arrangement is to simply divide the kids evenly, so that each parent claims the same number every year.  So if you have two kids, Dad will claim the oldest and mom will claim the youngest.  This way each parent gets a deduction every year, and you avoid the sudden shifts in your deductions from year to year.  Of course, unless you have twins, one child will be ineligible to be claimed for the deduction before the other.  When that happens, just switch to an alternating scheme (like above) for the remaining child.

It is certainly possible to award all of the tax deductions to one parent all the time, but there are potential downsides to that as well.  First, it’s not very likely that that other parent will agree to it.  It mostly happens in default divorces where one parent doesn’t bother to show up to court.  There are not a lot of situations where a judge would order all the deductions to go to one parent, all the time.  Second, such arrangements tend to be less durable.  If mom gets all the tax deductions every year, eventually Dad will get frustrated and try to go back to court to change it.  He may or may not succeed, but arranging a more equitable division to begin with might have avoided a lot of frustration and conflict down the road (not to mention the cost to both sides in attorney fees).

Perhaps the most financially savvy solution, though one that lacks the considerable virtue of simplicity, is to have each parent calculate the value of claiming the children on their taxes, and then have the parent receiving the largest benefit buy out the other.  For example, Dad runs the numbers and discovers that, if he claims both children, his tax return increases by $500.  Mom runs the numbers and discovers that, if she claims both children, her tax return increases by $200.  So Dad pays mom the $200 she would have gained by claiming both children, then he claims both children and gets an extra $500 (for a net gain of $300).  This way, the tax benefits to both parents are maximized, every year.  This arrangement might require the use of an accountant, and does necessitate a cordial enough relationship between the parents to at least be able to communicate about basic financial matters.  Here’s what the language to accomplish this might look like:

“The parent who does not have the right to take a tax deduction has the option to purchase the deduction from the other parent as follows: by March 1st of each year, the parties will determine the amount of tax savings the parent with the deduction would realize from claiming the child or children as a deduction. The parent wanting to purchase the deduction may then purchase from the other parent the right to claim the deductions for an amount equal to the other parent’s projected savings. The parent purchasing the deduction must tender payment, in full, to the other parent by April 5th. Upon receipt of payment, the parent with the deduction shall execute any necessary tax forms to enable the parent purchasing the deduction to claim the deductions.”