Tax Considerations in Child SupportFeb 01 2018
Income tax deductions and credits for families with children can be substantial and require review of several different sections of the tax code - a daunting task. Few folks enjoy taxes, but to calculate child support correctly, taxes for each parent must be reviewed. Luckly the child support guidelines provide guidance on how to calculate most adjustments. Using eFamilyTools, all these calculations are done instantaneously for you.
If parents agree to alternate the tax benefits on an annual basis, tax adjustments are usually considered not applicable. This is because the parents alternate claiming the children and every other year will receive 100% of the benefits for claiming the children. When the parents cannot agree or do not wish to alternate the tax benefits, the parent not claiming the children is entitled to a reduced child support obligation. Tax adjustments in a child support case can be significant and should not be neglected.
So, which parent should claim the child for tax purposes? This is a difficult question to answer because it depends on many factors. Parents are typically advised to take advantage of the tax deductions in the manner most advantageous to both parties. For instance, the higher income earner may benefit more by claiming the children every year on income taxes. This occurs because the higher income earner may be in a higher tax bracket. However, some benefits, such as the child tax credit and the child and dependant care tax credit are reduced or phased out at higher incomes. Therefore, it is possible that the lower earner may benefit more in certain situations. We find that higher income earners usually see greater dependent exemption adjustment and the lower income parent "may" benefit more from tax credits. The only way to determine the most beneficial arrangement is to calculate all the tax factors for each family.
Some factors included in the Kansas income tax consideration are as follows:
- State and Federal taxable income and marginal rates - marginal tax rates are determined directly from the taxable income. To correctly calculate the tax adjustment, the taxable incomes and adjusted gross incomes must be used. Typically, the prior-year tax return is used to determine these values.
- Dependent Exemption Adjustment - this tax deduction is due to the additional personal exemption allowed for additional children. Since this is a tax deduction, it is affected by the parent's tax bracket. The higher the tax bracket, the greater the adjustment.
- Head of Household (HOH) - tax benefits result to a parent who is eligible for HOH tax filing status as a result of claiming the chilren as dependents. The benefit is quantified as the difference in the HOH standard deduction over the single standard deduction. Additionally, Kansas allows one additional exemption when claiming HOH.
- Self-Employment Tax - self employed persons are responsible for both the employee's and employer's halves of the social security tax. This has the effect of reducing the taxable and child support incomes. It should be noted that social security tax is phased out at a certain income level, which can complicate this calculation.
- Child Tax Credit - the child tax credit is currently worth $1000 and is simply multiplied by the number of eligible children. Since this is a credit, it is subtracted directly from the amount of tax owed and, at maximum value, calculates to 1000/12 = $83 per month credit.
- Child Care Tax Credit - the child care tax credit refunds a portion of expenses for child care if the child care was required to allow the parent to work. The amount of the refund is based on adjusted gross income and decreases as income increases. This credit is only applicable for children 12 years or younger.
After consideration of each of the above tax deductions and credits, each of the adjustments must be calculated on a monthly basis. The following are examples of the calculated adjustments that eFamilyTools provides.
- Exemption Adjustment (Federal and State)
- Head of Household Adjustment
- Self-Employment Deduction - applied as reduced child support income
- Child Tax Credit Adjustment
- Child and Dependent Care Tax Adjustment - applied as reduced child care expenses
Each of the adjustments above are calculated to a monthly amount and applied to the child support case. It is noted that the child and dependent care tax adjustment is included as a separate line item (D.5) on the child support worksheet. Rather than being included as a tax adjustment, this amount is included when considering child care expenses.
In conclusion, taxes are a broad and complex topic that require special consideration in a child support case. For low income families, tax adjustments can account for 25% of the payment, so care must be taken to ensure each section of the calculator is populated correctly. Please give us some feedback. If there is a specific section of the tax adjustments you would like to see more detail on, please let us know.