A child custody agreement can seriously affect your tax filing and taxes overall. This issue should be addressed with your attorney or with your accountant while you are going through the process of negotiating or litigating child custody or a divorce agreement. Waiting until after you have finalized a child custody agreement to investigate the tax impact is not advisable.
State law on child custody does not dictate who gets the tax deductions. If your child custody agreement is entirely silent on this issue, the parent with primary residential or sole custody will have all of the tax benefits available through the children. That party can claim the children as deductions, and so forth. This can be a significant issue. Some parents assume that if they pay thousands of dollars per year in support, they can take the children as deductions. Not so. This is incredibly important when you consider that all child support payments are not tax-deductible to the payor, and they are not taxable to the recipient parent.
Thus, when negotiating your child custody agreement, you must address the issue of how custody will be structured and who will receive the tax benefits. This negotiation should be a part of an overall financial scheme that considers all issues, including child custody, child support, property, alimony, and tax impact.
The ability to claim head of household instead of married, filing separately, or even filing single can be essential to your overall tax scheme. You can claim head of household if you have your children for more than 50% of the time. Thus, a head of household tax filing should be a part of the overall negotiating outline in a divorce or separation. A silent child custody agreement on this issue is not well-negotiated or written.
Your child custody agreement can address this issue in several ways. If your child custody agreement provides for joint shared custody, it must state who has the children for 50% of the time. If you have two children, you can divide that up so that each parent has the possibility of being head of the household. If you have joint custody and one parent has residential custody, you can still provide a head-of-household deduction to the other parent by wording the agreement to allow that filing.
Other tax benefits are available to parents that must be considered when negotiating a child custody agreement. Many or most of those tax benefits are variable depending upon your income level ad whether or not you can claim the child or children as deductions. If you are thinking through your child custody agreement, you will negotiate all of these benefits. The objective should be to maximize all available benefits for both parties, thereby providing an overall highly advantageous tax impact for your child custody agreement.