Getting a divorce can be one of the most stressful times in your life. In addition to the emotional toll, it costs, on average, $15,500. As you split your assets, including cars, homes, and retirement accounts, don’t forget to think about the financial implication of your custody decree.
There are financial considerations related to your children that go beyond child support and that you would be wise to include them. From everything to the federal dependent tax credit to your daughter’s piano lessons, here’s what you should think about when it comes to kids, divorce, and taxes.
Child Tax Credit
The child tax credit allows you to claim an annual credit for any dependents in your home. It can be up to $2,000 per child and $500 per qualifying dependent. For many families, this is a big help on their tax return. Once your divorce has been finalized, however, you’ll be filing singly. So, who takes the child tax credit on their taxes?
For simplicity’s sake, most couples with 50/50 custody agree to trade the deduction off every other year. The father gets the deduction in odd years, the mother in even years, for example. If, however, custody is not 50/50, the parent who has more time also usually gets the deduction.
In some instances, if there is a large income discrepancy, the parent who makes a significantly higher income could cut a deal with the other parent. In order to keep the child tax credit every year, they may offer more money in the settlement or higher alimony payment.
Another thing to consider is whether or not the deduction should be tied to child support. If it’s an odd year and the father gets the dependent care deduction, but he’s behind or hasn’t paid child support, you can put in your decree that the mother can take it that year. Discuss all options with your lawyer before agreeing to a plan.
Daycare or Afterschool Care
If your children are young, and still in daycare, or need before and after school care, don’t forget to include these costs and their associated deduction in your decree. While the expenses can be split evenly, in some states (such as Minnesota), they’re often divided up by either the parent’s income levels or custody time. If your ex makes significantly more than you do, they’ll pay more for daycare.
The federal government does allow you to deduct either daycare or before and after school care expenses. Your deduction amount will be a percentage of the total, and that percentage is based upon your income. If you live in a state with income taxes, talk to your accountant about both limits and deductibility of daycare and afterschool care. It varies by state and could depend upon your income.
And don’t forget about the summer! While overnight camps aren’t tax-deductible, summer day camps for children under the age of 13 that allow you to work can be deducted.
Extracurricular Activities
Even if you’ve been splitting costs amicably during the divorce, it’s a good idea to put everything in writing. If your son loves his swimming lessons, ask your lawyer to include in the decree that he’s allowed to continue them for as long as he wants. Also, include any other sports, or other opportunities, you want your children to experience.
This language can be broad, such as “one additional afterschool activity,” if your child hasn’t chosen a sport yet. But it should provide for both continuing or starting new activities and cover who will pay for them. It’s an unfortunate reality that some parents choose to become petty about money once they’ve split. A good co-parenting relationship can change once your ex-spouse remarries, and they could decide to stop splitting bills they once paid without argument.
Negotiate to add clauses about extracurricular activities, transporting your kids to them, and who will pay. If you’re concerned about the cost, you can set a cap on quarterly or annual expenditures. The IRS considers extracurricular activities to be personal expenses, and will not allow you to deduct them. But it’s still not something to overlook for your own peace of mind.
Further Education
While you can’t always get the other party to agree to who will pay for college or education beyond high school, it’s good to think about adding it to your decree. Some parents decide to split the costs 50/50, others agree to split three ways between the parents and the child. Either parent can deduct up to $4,000 of higher education tuition and fees, so it’s something else to address with your lawyer.
The Final Decree
Divorce is a complicated, messy business. Depending upon your children’s ages, you might have to live with the final decree for years to come. Talk with your lawyer and your accountant about every financial aspect of raising your children that you should include. Going back to court to address an omission can be quite expensive.
Tax laws also change, as do deduction limits and percentages. While you can’t predict what the government will do in the future, you can have your lawyer draft language which leaves room to re-negotiate at certain milestones. You can tie reassessments to kindergarten, high school, college, or other times when it might make sense to revisit your original agreement.