• The federal tax laws for child support payments provide tax-free income to the custodial parent.tax forms image by Chad McDermott from Fotolia.com
  
  Payments designated as monthly child support obligations within a property settlement agreement or divorce decree may be given tax-free treatment by the Internal Revenue Service. The IRS allows favorable tax treatment for child support payments only. The IRS will treat alimony differently. Alimony, which is spousal support, is taxable to the payee and deductible to the payer. For these reasons, it is important to understand the tax implications that may arise from improperly drafted property settlement agreements.
  
  

Child Support: Non Taxable

• Child support payments that are paid to the custodial parent are not considered taxable income for the recipient. Similarly, the IRS does not provide a deduction to the payer for making the child support payment, unlike the federal tax benefits alimony payers receive when making alimony payments.
  
  If the payment is not specified within the agreement as specific child support but instead labeled "family support" or "spousal support," then the IRS will treat it as alimony.
  
  (See References 1 and 2)
  
  Legislative or policy concerns regarding the difference in tax treatment may explain why the two are taxed differently since alimony is support for an adult while child support is support for minor children.
  
  

Exemptions for Dependents

• The IRS allows only one divorcing spouse to claim each dependent deduction. If spouses have two children then they may wish to consider each taking one deduction. Otherwise, the court will decide who receives the tax exemption in the absence of a written agreement.
  
  If the parties may not agree, and the family law court does not address the deduction, then the IRS has specific tax rules regarding the allocation. Typically, the parent who lives with the child for the majority of the year may take the deduction. Usually, this will be the custodial parent.
  
  (See References 2 and Resources 1)
  
  

Filing Status: Head of Household

• The divorced spouse who is the custodial parent may also receive more favorable tax treatment by filing the 1040 return form as "head of household." Filing as head of household instead of filing individually provides a larger tax exemption. If the custodial spouse is unmarried, divorced or separated, and is responsible for over half of the household expenses, then the IRS allows individuals to receive this tax benefit.
  
  The noncustodial parent making the child support payment cannot include the total payment amount to file as head of household. Usually, only the custodial parent may file as head of household since the IRS requires a qualifying relative or child to live with the taxpayer. The benefit applies to those who take standard deductions, and itemization is unnecessary.
  
  

Costs of Getting Divorced: Alimony Legal Fees

• The IRS allows a deduction for legal fees that are paid to protect or produce income. This may include income the taxpayer recipient obtains from collecting past-due alimony payments. The IRS will not allow deductions for legal divorce fees on the portions not related to collecting alimony income. The deduction is only available to taxpayers who itemize and meet the 2 percent IRS adjusted gross income threshold.