Tax season is upon us and I’ve been getting a lot of questions about child support and taxes. First, Colorado child support is generally not taxable. Unlike maintenance/alimony, the payor of child support cannot deduct paid child support from their taxable income. Similarly, a parent receiving child support need not report that money on their tax return.
Second, a minor child can be claimed as a dependent on a parent’s tax return. Who gets the dependency exemption? Pursuant to C.R.S. 14-10-115(12), the Colorado court is required to allocate the right to claim a child as a dependent in proportion to the parents’ contributions to the costs of raising the child. If a mother has more parenting time than the father and she pays for the child’s sports, tutoring, health insurance, daycare, etc., the court will likely give her the right to claim the child as a dependent.
Nevertheless, the parties can always voluntarily agree on which parent gets to claim a child in a particular year. Although Colorado has done away with the term “custody” in favor of “parenting time,” the IRS predictably is behind the times. The “custodial parent” matters for IRS purposes and is defined as the parent with the most overnights. Because there are an odd number (365) of days in a year, one parent will almost always have more than the other even when they are “50/50 parents” or have “equal time.” That parent is then the “custodial parent” under the current IRS regs and the one eligible to claim the child as a dependent. There are times when the IRS regs conflict with the Colorado law on who gets to claim the child as a dependent. As a result, it is usually a good idea for parents to sign IRS Form 8332 along with their divorce or allocation of parenting rights agreements to ameliorate any issues down the road if the parties agree to split the right to claim a child on future tax returns.
In addition to the dependency deduction, the current tax code allows for a separate deduction for work-related day care and a credit (different from a deduction) for each child. The rules on those deductions and credit are complex because they hinge on the taxpayer’s income and other factors. Tax laws change all the time and my advice is always for a client to consult with a CPA or tax attorney before signing a deal.
Although parties going through a Colorado divorce or dispute over parenting rights often times will disagree about the color of the sky on particular day, there are times when it makes sense for them to strategically work together on taxes. For example, if one parent cannot benefit from the tax credit because they make too much money, they can offer to give the other parent the right to claim that child and split the amount of the credit. It results in a “win-win” for both parents. It is rare to characterize anything as a “win-win” in a Colorado divorce or when discussing anything related to taxes, but it is possible if the parties have thoughtful divorce lawyers and CPAs.