Child Support

Child Support as Parent with Custody 

Managing the transition into single parenthood requires a new approach to budgeting. While child support helps cover food, shelter, medical bills, education, and childcare, there are additional factors to consider. You may also need to provide clothing, extracurricular activities, entertainment, travel, and other discretionary spending.

Creating a detailed budget will help you how to allocate funds and possibly prepare for unforeseen costs.

Personal Emergency Fund

An emergency fund may serve as a safety net to provide for your child’s needs and expenses. As a general guideline, financial experts often recommend saving three to six months' worth of living expenses in an emergency fund  . However, as a single parent, could you face additional financial responsibilities and a heightened risk of unexpected circumstances, so aiming for the higher end of this range is recommended.

Estate Plan

Estate planning for a single parent with custody involves looking out for the financial well-being of dependents in the case of unforeseen circumstances and making provisions to protect assets for their future benefit. However, directly naming children as beneficiaries, especially minors, can lead to unintended consequences like asset seizure in divorce settlements or legal judgments.

Opting for a trust may offer material benefits, providing asset protection, control over distributions, and safeguards against creditors and divorcing spouses.

College Financial Aid Concerns

Navigating Free Application for Federal Student Aid (FAFSA) as a student of divorced parents can be intricate, so it’s best to apply early. For divorced parents, determining who claims the child as a dependent for tax purposes can affect the calculation of Expected Family Contribution (EFC), which in turn influences financial aid awards.

Additionally, income and assets of both parents, including child support received or paid, are considered in the FAFSA process. To maximize financial aid for your child, you’ll need to ensure accurate reporting of income and assets on the FAFSA and explore all available exemptions and allowances.

Child Support as Non-Custodial Parent

Child support contributes to the well-being and upbringing of your child, irrespective of any disagreements with the custodial parent. In navigating child support responsibilities, new financial considerations may emerge, such as adapting to changes in income or employment status, understanding the impact of bonuses or financial windfalls on support calculations, and considering the option of payments in-kind to directly fulfill your child's needs.

How Income Impacts Child Support Payments

Determining child support payments hinges largely on state-specific guidelines, with each parent's income as the primary factor.

Beyond income, adjustments are made for various factors such as shared physical custody, healthcare expenses, childcare costs, and more. While state guidelines establish thresholds and self-support reserves, courts may deviate based on children's needs and parental lifestyle. Parents may agree on amounts higher or lower than state guidelines, but courts can intervene if disputes arise.

Income for child support purposes encompasses more than just wages, including bonuses, investments, inheritances, and windfalls. Earning capacity may also be considered if a parent is deemed capable of earning more.

Child support arrangements are subject to modification based on changes in income or circumstances.

Payments in Kind

In some cases, obligor parents may opt to fulfill their child support obligations by directly providing for their children's needs, such as purchasing clothing and school supplies, instead of making cash payments to the custodial parent. While this approach may seem practical, it's essential to note that payments in-kind are not typically credited against the support due, especially when court intervention is involved in administering child support.

If your arrangement is not monitored by the courts, you could have more flexibility to mutually agree upon in-kind payments to fulfill a child support obligation.

Child Support Taxes

The impact of child support taxes on your overall financial situation is an area that can be easily overlooked. Child support payments are not tax-deductible, meaning they cannot be claimed as deductions on the payer's tax return, nor are they considered taxable income for the recipient.

Additionally, only the custodial parent may deduct the Child Tax Credit or the Earned Income Tax Credit — unless there is a court order stating otherwise.

Financial Planning for Child Support

Whether you're contemplating divorce or have already begun the process, divorce financial planning can help you understand your rights and obligations and navigate the complex financial aspects of divorce with confidence.

Reach out to an EP Wealth advisor to discuss your situation.