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What you need to know about your taxes if you pay or receive child support.

For federal income tax purposes, child support is tax-free to the recipient, meaning neither the ex-spouse nor the child owes taxes on it. However, child support payments are not tax-deductible by the parent who makes the payments -- unlike spousal support payments. (Spousal support is tax-deductible for the person who makes the payments and taxable to the recipient.)

Be careful how support is characterized in your marital settlement agreement, as it may have significant tax consequences.

What Qualifies as Child Support?

In order to qualify as child support, the payments received by an ex-spouse must be designated as child support in the divorce or separation agreement. If the agreement lumps the payments together as "family support" or "alimony," or doesn't otherwise designate a specific portion of each payment as child support, none of the payment will be considered child support for tax purposes.

This can have adverse tax consequences for the recipient of child support payments, because family support or alimony is taxable to the recipient. So instead of receiving nontaxable child support, the ex-spouse will be receiving alimony, which is taxable to the payee, regardless of what the payee actually uses the money for.

Who Gets to Claim a Child as a Dependent?

Generally, in order for someone to claim a child as a dependent, he or she must provide at least 50% of the child's support during the tax year. For couples who are still married and living together, claiming kids as dependents is usually a slam-dunk.

Things get complicated, however, when parents divorce or separate. Now, only one of you can claim the dependent exemption. (The IRS will come down hard if both of you try to claim it; they cross-reference dependents' Social Security numbers to make sure taxpayers aren't doing this.)

Special Rule for Parents Living Apart

If the parents lived apart at all times during the last six months of the calendar year, or if they have a written divorce decree, maintenance agreement, or separation agreement, there is a special rule that applies.

In this case, if the child received more than half of his or her total support for the year from one or both parents and was in the custody of one or both parents during the year, the IRS rules assume that the custodial parent (defined as the parent who has custody of the child for the greater part of the year) should get the exemption for the dependent. However, the parties may change this presumption and allocate the exemption to the noncustodial parent if either of the following are true:

• The divorce decree or separation agreement contains a provision in which the custodial parent waives the right to claim the dependent exemption. (The rules are slightly different if the agreement was entered into prior to 1985; the noncustodial parent must also provide at least $600 of support to receive the exemption.)
• The custodial parent signs a declaration (using IRS Form 8332) relinquishing his or her right to claim the dependent exemption, and the noncustodial parent attaches this declaration to his or her tax return. Using this form, the custodial parent can relinquish the exemption for one year, a number of years, or forever, depending on what the parties agree to.
• If you relinquish the exemption, you are also relinquishing eligibility for the child tax credit.

The IRS is very picky about Form 8332, and can (and often does) disallow the dependent exemption for the noncustodial parent if this form isn't signed and attached to the tax return, even if the divorce decree or separation agreement allocates the exemption to the noncustodial parent. That means it's very important for the noncustodial parent to attach a copy of this declaration to his or her return in every tax year in which he or she claims the exemption.

If the custodial parent refuses to sign Form 8332, the noncustodial parent can attach part of the divorce decree or separation agreement (the cover page, the page that discusses the exemption and the signature page) to his or her tax return to prove that he or she is entitled to the exemption. However, the IRS will accept this only if the decree or agreement doesn't require that certain conditions be met before the noncustodial parent can claim the exemption. If there are conditions, the noncustodial parent must use Form 8332 or not get the exemption.

Rule for Unmarried Parents or Those Still Living Together

If the parents are not married, did not live apart during the last six months of the calendar year, or do not have a written document, the test for determining which parent can claim the child as a dependent is that the parent who provides more than 50% of a child's support during the tax year can claim the child as a dependent.

Rules for Parents Who Contribute Equal Amounts of Support

If neither parent provides more than half of the child's support for the year, things get even more complicated. For more information on how to handle this situation, see IRS Publication 504, Divorced or Separated Individuals, which you can download for free from www.irs.gov.

Copyright © 2006 Nolo

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Paternity must usually be established before child support can be collected.

The question "Who is the father?" is not as simple a question as you might think. There are important legal distinctions between different situations relating to paternity.

When Paternity Is Agreed On or Presumed

Acknowledged father. An acknowledged father is a biological father of a child born to unmarried parents for whom paternity has been established by either the admission of the father or the agreement of the parents. An acknowledged father must pay child support.

Presumed father. If any of the following are true, a man is presumed to be the father of a child, unless he or the mother proves otherwise to a court:

• The man was married to the mother when the child was conceived or born, although some states do not consider a man to be a presumed father if the couple has separated.
• The man attempted to marry the mother (even if the marriage was not valid) and the child was conceived or born during the "marriage."
• The man married the mother after the birth and agreed either to have his name on the birth certificate or to support the child.
• The man welcomed the child into his home and openly held the child out as his own.

In some states, any of these presumptions of paternity is considered conclusive, which means it cannot be disproven, even with contradictory blood tests. In Michael H. v. Gerald D., 491 U.S. 110 (1989), the U.S. Supreme Court upheld California's presumed father statute as a rational method of protecting the integrity of the family against challenges based on the due process rights of the father and the child.

A presumed father must pay child support.

Equitable parent. In Michigan (Atkinson v. Atkinson, 408 N.W.2d 516 (1987)) and Wisconsin (In re Paternity of D.L.H., 419 N.W.2d 283 (1987)), a spouse who is not a legal parent (biological or adoptive) may be granted custody or visitation under the notion of equitable parent. Courts apply this concept when a spouse and child have a close relationship and consider themselves parent and child or where the biological parent encouraged this relationship. If the court grants an equitable parent custody or visitation, then the parent will also be required to pay child support.

Alleged father. An unmarried man who impregnates a woman is often referred to as an alleged father, or sometimes simply as an unwed father. An alleged or unwed father will be required to pay child support if a court determines or he acknowledges that he's the father; in addition, an alleged or unwed father has the right to visitation with his child and may seek custody.

Stepfather. A stepfather is the spouse of a legal mother and is not also the biological father of the woman's children. A stepfather is not obligated to support the children of the woman to whom he is married unless he legally adopts the children.

Paternity Actions

A paternity action, a court suit filed to have a man declared the father of a child, can be brought by either the mother or the father. Paternity actions are sometimes called establishment hearings, filiation hearings, or parentage actions.

Most paternity actions are initiated by welfare officials who provide TANF (Temporary Aid to Needy Families) to the mother and are required by law to seek reimbursement from the father. The mother must cooperate in these proceedings; failure to do so can result in a reduction or loss of her TANF grant.

Today, blood and DNA tests can affirmatively determine paternity with a 99.99% accuracy and can rule out paternity with 100% accuracy.

If paternity is established following a paternity action, the court will order the father to pay child support and grant him custody or visitation rights.

Copyright © 2006 Nolo

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What records you should keep when you pay or receive alimony payments.

Alimony, also called spousal support, means paymenta by one spouse to another following a divorce. Courts don't always grant alimony, but where the marriage was long and one spouse earns a lot more than another, or one spouse left the workforce in order to raise children or manage the household, alimony is fairly common.

You must keep adequate records if you are paying or receiving alimony. This point cannot be over-emphasized. Frequently after a divorce, the spouses dispute, or the IRS challenges, the amounts that were actually paid or received. Without adequate documentation, the payer may lose the alimony tax deduction and/or be ordered to pay back support if the other spouse makes a claim in court.

Payer

Here are suggestions of records to keep:

• a list showing each payment (date, check number, address to which the check was sent)
• the originals of checks used for payments (keep in a safe place, such as a safe deposit box) -- be sure to note on each check the month for which the support is being paid, and
• if you pay in cash, receipts for each payment, signed by the recipient.

Be sure to keep these records for at least three years from the date you file the tax return deducting the payments.

Recipient

Make a list that shows each payment received. Include the following information:

• date payment was received
• amount received
• check number or other identifying information (for example, the number of the money order)
• account number on which any check is written
• name of bank on which check is drawn or money order issued
• a photocopy of the check or money order, and
• a copy of any signed receipt you give for cash payments.

Copyright © 2006 Nolo

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What you need to know about your taxes if you pay or receive child support.

For federal income tax purposes, child support is tax-free to the recipient, meaning neither the ex-spouse nor the child owes taxes on it. However, child support payments are not tax-deductible by the parent who makes the payments -- unlike spousal support payments. (Spousal support is tax-deductible for the person who makes the payments and taxable to the recipient.)

Be careful how support is characterized in your marital settlement agreement, as it may have significant tax consequences.

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