By Richard A. Mann, Mann Law PC
People going through divorce, paternity, or child support matters may make decisions that unknowingly have significant financial affect upon them. Under Indiana Law, child support orders are required to address the dependency exemption for children. See I.C. 31-16-6-1.5 which states:
- A court shall specify in a child support order which parent of a child may claim the child as a dependent for purposes of federal and state taxes.
- In determining which parent may claim the child as a dependent under subsection (a), the court shall consider the following:
- The value of claiming the child as a dependent at the marginal tax rate of each parent.
- The income of each parent.
- The age of the child or children and the number of years that the child or children could be claimed as a dependent or dependents.
- Each parent's percentage of the costs of supporting the child or children.
- If applicable, the financial aid benefit for postsecondary education for the child or children.
- If applicable, the financial burden each parent assumed under the property settlement in a dissolution proceeding.
- Any other relevant factors.
Many people think the custodial parent receives the exemption. That is the default under federal law if the order is silent. Along with the dependency exemption there are other considerations such as head of household status especially in cases with equal parenting time, lifetime learning credits, child care credit, under 17 child credit, etc. As far as the child care credit, a number that goes into the child support calculation is the cost of child care. A little known or used provision of the Indiana Child Support Guidelines states as follows: In circumstances where a parent claims the work related child care credit for tax purposes, it would be appropriate to reduce the amount claimed as work related child care expense by the amount of tax saving to the parent. The exact amount of the credit may not be known at the time support is set, but counsel should be able to make a rough calculation as to its effect. See commentary 3E1. What this means is that number could be reduced by the tax benefit by the custodial parent therefore reducing the child support. This may be fair as the non-custodial parent’s support includes a percentage based upon the relative income and pays the child care with no tax benefit.
I regularly am involved when I mediate when one or both parties are not aware of these provisions or the effect upon their case. Many lawyers have not taken a tax course or it has been many years since they did. In today’s family law setting you must be aware of many areas of law, since as explained above, tax could have a significant effect on your case, understanding of pensions and retirement may be a part of divorce, businesses may need dividing, social security benefits (the difference between SSI, SSD and SSR), food stamps, vouchers, employer provided health insurance, and bankruptcy is often a possibility in such matters.
The following article is an article from the IRS outlining many tax considerations. Summer camp may even qualify for the child care credit.
Many parents send their children to summer day camps while they work or look for work. The IRS urges those who do to save their paperwork for the Child and Dependent Care Tax Credit. Eligible taxpayers may be able claim it on their taxes in 2018 if they paid for day camp or for someone to care for a child, dependent or spouse during 2017.
Here are a few key facts to know about this credit:
- Qualifying Person. The care must have been for “qualifying persons.” A qualifying person can be a child under age 13. A qualifying person can also be a spouse or dependent who lived with the taxpayer for more than half the year and is physically or mentally incapable of self-care.
- Work-Related Expenses. The care must have been necessary so the taxpayer could work or look for work. For those who are married, the care also must have been necessary so a spouse could work or look for work. This rule does not apply if the spouse was disabled or a full-time student.
- Earned Income. The taxpayer -- and their spouse if married filing jointly -- must have earned income for the tax year. Special rules apply to a spouse who is a student or disabled.
- Credit Percentage/Expense Limits. The credit is worth between 20 and 35 percent of allowable expenses. The percentage depends on the income amount. Allowable expenses are limited to $3,000 for care of one qualifying person. The limit is $6,000 if the taxpayer paid for the care of two or more.
- Care Provider Information. The name, address and taxpayer identification number of the care provider must be included on the return. The childcare provider cannot be the taxpayer’s spouse, dependent or the child's parent.
- IRS Interactive Tax Assistant tool. Use Am I Eligible to Claim the Child and Dependent Care Credit? tool on IRS.gov to help determine if eligible to claim the credit.
- Dependent Care Benefits. Special rules apply for people who get dependent care benefits from their employer. See Form 2441, Child and Dependent Care Expenses, has more on these rules. File the form with a tax return.
- Special Circumstances. Since every family is different, the IRS has a series of exceptions to the rules in the qualification process. These exceptions allow a greater number of families to take advantage of the credit. For more information, see IRS Publication 503, Child and Dependent Care Expenses.
Even if the childcare provider is a sitter in the home, taxpayers may qualify for the credit. Taxpayers who pay someone to come to their home and care for their dependent or spouse may be a household employer. They may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax. Find more on that in IRS Publication 926, Household Employer's Tax Guide.
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