Illinois Matrimonial & Family Law

Support, Taxes, & Dependency
Exemptions

by Wes Cowell, updated 7 June 2015 -- suggest a correction

Parents can cooperate to maximize tax benefits of child support — it's smart for everyone, especially the the child. Need advice?  Call, leave your info, or scheduleschedule a consult.

Child support usually is not a tax deduction for the payor and is not taxable income to the recipient.  It doesn't have to be that way, though.

Unallocated Support and Maintenance:  Sometimes we can lump child support an maintenance together and call it a single payment for "unallocated support and maintenance."  That allows the payment to be a tax deduction for the payor and taxable income for the recipient.  To do this, the payment must satisfy the I.R.S. test under 26 I.R.C 71(c)(2).  If a reduction or termination of "unallocated payments coincides with a significant event related to the child (like, the child's 18th birthday, graduation from high school, etc.), however, then the amount of the reduction is viewed by the I.R.S as child support and only the balance of the payments is seen as alimony.  That can mean a hefty tax liability along with interest and penalties.

Making Child Support Deductible:  The I.R.S. test looks for reductions that fall within six months on either side of a child's birthday between the 18th and 21st birthday.  If an agreement sets a reduction date that clearly falls outside that range of dates, there shouldn't be a problem.  For example, setting unallocated support and maintenance for a paeriod of, say, ten years, and that date is not withing six months of a child's birthday or graduation or marriage or enlistment in the military, etc. then establishing a combined child support and maintenance order will obtain the tax benefits for those ten years.  

The Dependency Exemption:  The dependency exemption for a child was worth a $3,950 deduction in 2014 but begins to phase out once your income exceeds $254,200 (filing single).  Claiming the exemption allows a parent to also claim the child tax credit -- a $1,000 dollar-for-dollar reduction against the tax liability.  The child tax credit begins to phase out once income exceeds $75,000.  It also allows the parent to deduct up to 35% (with a cap of $3,000 for one child and $6,000 for two) of qualifying daycare and child care expenses.  

Illinois law (750 ILCS 5/606.10) requires that the parent with the majority of parenting time be designated the "custodial parent."  The designation has no meaning within Illinois family law and carries no weight in allocating or enforcing parents rights and responsibilities in the agreed Parenting Plan (or Allocation Judgment if not agreed).  The designation is"[s]olely for the purposes of all State and federal statutes that requir a designation or determination of custody of a custodian.  In other words, for allocating the dependency exemption and for school registration purposes. 

If your Parenting Plan (Allocation Judgment) awards both parents joint parental responsibility and equal parenting time, Illinois law mandates that one parent be designated the "custodial parent."  For the other parent to claim a child's dependency exemption, the "custodial parent" must sign off on a Form 8332 -- "Release of Claim to Exemption for Child by Custodial Parent" -- which must be attached to the non-custodial parent's tax return each and every year that the non-custodial parent claims the exemption.

Most parents agree to alternate the dependency exmption. If you want to fight it out with the IRS, this is from IRS Publication 17:

Children of divorced or separated parents (or parents who live apart).   In most cases, because of the residency test, a child of divorced or separated parents is the qualifying child of the custodial parent. However, the child will be treated as the qualifying child of the noncustodial parent if all four of the following statements are true.

1. The parents:

   • Are divorced or legally separated under a decree of divorce or separate maintenance,

   • Are separated under a written separation agreement, or

   • Lived apart at all times during the last 6 months of the year, whether or not they are or were married.

   • The child received over half of his or her support for the year from the parents.

2. The child is in the custody of one or both parents for more than half of the year.

3. Either of the following statements is true.

   • The custodial parent signs a written declaration, discussed later, that he or she won't claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return. (If the decree or agreement went into effect after 1984 and before 2009, see Post-1984 and pre-2009 divorce decree or separation agreement, later. If the decree or agreement went into effect after 2008, see Post-2008 divorce decree or separation agreement, later.)

   • A pre-1985 decree of divorce or separate maintenance or written separation agreement that applies to 2015 states that the noncustodial parent can claim the child as a dependent, the decree or agreement wasn't changed after 1984 to say the noncustodial parent cannot claim the child as a dependent, and the noncustodial parent provides at least $600 for the child's support during the year

Earned Income Tax Credit:  The earned income tax credit is for low- to moderate-income working individuals and couples -- especially those with children. The amount of EITC benefit depends on a recipient’s income and number of children.  Keeping a child's dependency exemption can pay of in a BIG when used in conjunciton with the EIC.  THe numbers change year-to-year so I'm not posting detail.  Get the details from your lawyer.  If you don't have a lawyer, you need one.