Child Support and Taxes: Non-Custodial Parent FAQs
Whenever taxes and child support mix, it is usually a complicated situation. If there is a large sum of money involved you are almost certainly better off consulting a divorce attorney. That said, remember that a touchstone of state guidelines for setting child support is that the final support award is "income driven" -- determined primarily by the income of the parties. It is therefore vital that parents understand what funds can be considered "income" under the child support guidelines.
For example, the income of a new spouse, to the extent that income directly reduces expenses of the custodial parent, is considered income for child support purposes. See FindLaw's Child Support section for a bevy of articles and information. Further, child support payments are not considered taxable income, according to the IRS. Child support payments are neither deductible by the payer nor taxable to the payee. When you calculate your gross income to see if you are required to file a tax return, do not include child support payments received.
Q: Does the Form 8332 (used to release the exemption to the noncustodial parent) affect the Child Tax Credit?
A: Yes. The Child Tax Credit can only be claimed by the parent claiming the exemption. In this case the noncustodial parent would qualify for the dependency exemption and therefore the child tax credit. Please refer to the Instructions for Form 1040 (PDF) or the Instructions for Form 1040A index for Child Tax Credit. The referenced pages will explain who qualifies for this credit, and how to calculate it.
More on the Child Tax Credit: Publication 972
Q: If the noncustodial parent receives permission from the custodial parent to claim a child on his or her tax return, is the noncustodial parent eligible for the Earned Income Credit?
A: The noncustodial parent cannot claim the Earned Income Credit on the basis of that child because the child did not live with that parent and does not meet the residency test. The custodial parent may be able to claim the Earned Income Credit.
Refer to Publication 596, Earned Income Credit, for the Earned Income Credit rules.