One of the most significant and enduring responsibilities a parent has is to provide for their child’s well-being, a duty that remains even when parents part ways. Child support helps provide children with the financial support they need after a divorce. However, parents may be uncertain about how child support impacts their taxes. Understanding any tax implications of child support is important for making informed decisions during and after a divorce in Nebraska.
Child Support vs. Alimony: Which One is Taxable in Nebraska?
It’s important to understand the distinction between child support and alimony (spousal support), as they are treated differently under tax law and can have varying financial implications for both parties involved.
Child Support
Both federal and Nebraska state law specify that child support payments are not considered taxable income. If you are the parent receiving child support, you do not need to report these payments on your tax return. Likewise, if you are making child support payments, you cannot deduct them from your income when filing your taxes. This rule applies regardless of how the arrangement is determined, such as through a court order or mutual agreement.
The primary purpose of child support is to benefit the child, and tax laws reflect that by exempting it from tax reporting and deductions.
Alimony
Alimony, or spousal support, is treated quite differently. For divorces finalized before December 31, 2018, alimony payments are considered taxable income for the spouse receiving them and deductible for the spouse making the payments. This creates a tax burden for the recipient, but allows the payer to reduce their taxable income.
However, for divorces finalized on or after January 1, 2019, there was a significant change in federal tax law. Under the revised tax code, alimony payments are no longer considered taxable income for the recipient, and the payer can no longer deduct them from their taxes. This change has had a major impact on divorce settlements, particularly in Nebraska, where it has shifted the financial dynamics between ex-spouses.
It is important to understand these distinctions, because the way alimony and child support affect taxes can significantly influence financial planning, negotiation strategies, and long-term financial stability after a divorce. Consulting with a legal or tax professional in Nebraska can help both parties be fully aware of how these laws affect their specific situation.
Determining Who Can Claim the Child as a Dependent
When parents divorce, determining which parent can claim the child as a dependent on their taxes can have certain financial implications. The IRS has specific guidelines for determining dependency status in the case of divorced or separated parents, and these rules apply consistently across all states, including Nebraska. Typically, the custodial parent—the one with whom the child spends the most nights during the year—has the right to claim the child as a dependent. However, there are circumstances where this status can be negotiated or transferred to the non-custodial parent.
IRS Rules for Claiming a Child as a Dependent:
- Custodial Parent Rule: The parent who has the child for more than half of the year (at least 183 nights) is considered the custodial parent and generally has the right to claim the child as a dependent on his or her taxes.
- Form 8332 – Release of Claim: The custodial parent can transfer the right to claim the child to the non-custodial parent by signing IRS Form 8332. This form releases the custodial parent’s claim to the dependent exemption and allows the non-custodial parent to claim the child for that tax year.
- Divorce Decree Agreement: In some cases, Nebraska divorce decrees may specify which parent will claim the child as a dependent. Parents can agree to alternate years or split the exemptions when multiple children are involved. These agreements should be formalized in the decree to avoid conflicts.
- Tax Benefits for Claiming Dependents: The parent who claims the child as a dependent may qualify for additional tax benefits, such as the Child Tax Credit and the Earned Income Tax Credit (EITC), as well as potential deductions for childcare and educational expenses.
- Tie-Breaker Rule: If both parents attempt to claim the child, the IRS uses a “tie-breaker” rule. The parent with whom the child lived the longest during the year will have the right to claim the child on their taxes. If the child spent equal time with both parents, the IRS will grant the exemption to the parent with the higher adjusted gross income (AGI).
Understanding and following these rules can help parents avoid unnecessary disputes and potential issues with the IRS.
Nebraska-Specific Considerations for Child Support and Taxes
While Nebraska follows federal tax laws regarding child support, there are some unique aspects of Nebraska divorce proceedings that parents should consider.
Prioritizing the Child’s Needs Over Tax Considerations
In Nebraska, the courts prioritize the best interests of the child when determining child support agreements or modifications. This focus means that decisions are made primarily with the child’s well-being in mind, rather than tax implications. The financial needs of the child will always take precedence over any potential tax benefits or burdens that the support arrangements might create for the parents.
Voluntary Payments and Tax Treatment
Parents need to understand that voluntary payments made for extra expenses, such as extracurricular activities, gifts, or other expenses beyond what is required by the court, are not considered part of formal child support. These payments are not tax-deductible for the paying parent, nor do they change the tax treatment of the payments. Parents should be mindful of this when providing financial support outside the court-ordered child support arrangement.
Medical Expenses and Tax Deductions
In many Nebraska divorce agreements, both parents may share responsibility for covering their child’s medical expenses. Either parent can claim a deduction for these expenses, even if they are reimbursing the other parent for their share. The deduction is based on each parent’s proportionate share of the expenses. Typically, to qualify for this deduction, the total medical and dental expenses must exceed 7.5% of the paying parent’s adjusted gross income (AGI). Consulting with a CPA and a divorce attorney can help ensure your situation is handled correctly.
Navigating Child Support and Taxes with Confidence
When navigating child support in Nebraska, it’s important to understand that it does not affect your taxes directly. However, considering the broader financial picture, including alimony and tax benefits related to children, can help you plan for a better future. If you are negotiating or modifying a child support agreement, consulting with a divorce and family law attorney who understands Nebraska’s laws can ensure that your financial and legal obligations are met.
If you have questions about child support, alimony, or the tax implications of your divorce, reach out to Nebraska Legal Group. Our experienced divorce and family law attorneys are ready to guide you through the process and help protect your family’s financial future.