There are many things to consider during and after a divorce. If there are children involved, managing your finances is especially important. Since divorce can be expensive, you need to consider the expenses of two homes, two sets of utility bills and the childcare expenses. How you handle these childcare expenses is an important aspect of your financial well-being after your divorce. But how do you manage the childcare expenses? What are the best ways to do this? This article will help you sort all the factors out and arrive at a plan that will best meet your financial needs.
Most states have guidelines and formulas to determine how much child support is awarded and to which parent. Child support does not necessarily cover other child expenses like daycare and babysitting, extracurricular activities, medical expenses. There are also important tax advantages related to childcare. All these things should be considered when developing a comprehensive childcare agreement.
DK Simoneau offers some concrete tips for managing the childcare expenses:
- Don’t use money as a manipulator. Keep the children out of it. Use a financial planner with your ex if possible. In high conflict situations, consider setting up a trust where someone else manages the money.
- Agree on how to handle day to day expenses. Some things to consider are: who pays for extracurricular activities, how do you handle birthdays and holidays, who does the shopping, who pays, is there one main person responsible for the finances, who pays for medical costs and childcare?
- Set up a savings account for each child. The purpose of each account is to pay for those extracurricular activities that may be incurred for each child. Decide how much each parent will contribute each month. When an expense comes up, consult with the other parent and then deduct that from the savings account. This method relieves the pressure of coming up with the money in an emergency situation. You could also set up a credit card or joint checking account that allows both parents to use it.
- Pay for school lunches with an app you find independently or use one that the school offers.
- Start a college fund. Make this a separate account that cannot be touched. Each parent must agree on the amount each contributes. You could also use a mutual fund or 529 savings account.
- Buy savings bonds. These can be used for the child at their maturity.
- Buy life insurance. Each parent should have life insurance that covers the remaining parent should one die. The money from the policy could be put in a trust or go directly to the ex-spouse.
- Meet with a tax adviser. He/she will be in the best position to advise you on how to handle things for your best interest.
- Write a will. Decide how custody, finances, and assets will be handled after your death.
Geoff Williams gives some important tips for splitting parenting expenses:
- Parents should strive to communicate their needs and expectations to their ex. They should decide together what expenses are important and which ones are optional and not needed.
- Devise a system for deciding how much each parent pays for childcare expenses. In some cases, you can use the system that your state sets up for determining how much each parent should pay. In other cases, some parents pay for what they feel is important and then their ex pays for what they feel is important.
- Be careful when discussing money issues with your kids. Rely on a friend or therapist to hear your complaints about your ex and the money issues, not your children. It’s OK to talk with the kids about living within their means, but not about your feelings of childcare expenses and your ex.
- Keep lawyers out of it when possible. It is expensive and complicates the issues. It can also add extra stress on an already fragile relationship.
Setting up a joint bank account offers some real positive advantages for managing childcare expenses, says Nicole Levy:
- Joint accounts can be set up in several different ways. They could be used for medical insurance, childcare costs, to purchase school lunches, clothing, sports equipment. One rule of thumb is that if the item goes between the parents’ homes, then it should be paid for out of the joint account. Other costs for older kids include cell phones, computer equipment, cars, car expenses, costs of college outside of tuition. Joint accounts in these circumstances can be a great way to control children’s spending.
- How is the joint account funded? Usually, each parent pays a fixed amount each month based on their ability to pay. Another way is to assign a certain percentage from a specific income source to go into the fund. Finally, some parents fund on an as-needed basis. These accounts save for child care costs and also track the expenses.
- Find the right account to meet your needs be it an online app, debit card, joint access, etc. Decide who is responsible for the account…maybe one is the primary spender, maybe joint access and use of the account,
- There are some pitfalls to consider: What are the eligible expenses, how are the funds expended, who has account access, what if one parent is disinterested, what are the banking rules, etc. Finding the answers to these beforehand will help you in determining the best course of action for you.
Angie Gambone explains some things to consider when deciding how to split the expenses for your kids in a divorce. There are extraordinary expenses, that are not included with the payment of child support: private school tuition, sports, dance, music, camp, school trips, prom, etc. Most states preschool or daycare, medical expenses are not considered extraordinary. Parents should review the expenses each year and make adjustments as the child gets older. Divide the expenses either by a state income-based formula or each parent pays a certain amount each month.
Mandy Walker gives a list of things to consider when deciding on how to share the childcare expenses since financial issues are always a bone of contention between divorced parents:
- Remember that child support doesn’t cover many things like school supplies, sports, lessons, college prep, computers, etc. These can be included if forethought is put into the calculations at the time of the divorce settlement.
- Try to create a flexible agreement. Try not to be too specific because it puts limits and restrictions on both parents. Come to an agreement and include it in your official divorce papers.
- Agree on the activities that your children will participate in. Keep things open for opportunities that may arise or if your child expresses an interest in something. Be sure to make adjustments over time as your children age.
- Decide on how expenses will be shared. Usually, expenses are shared equally or by percentage of the parent’s income.
- Settling the expenses is also something that needs consideration. How often are you going to settle the outstanding bills for the expenses? How will you keep track of expenses (spreadsheet, envelope with receipts, etc.)? Agree upon a frequency or a minimum amount of expenses to initiate the reimbursement.
- Don’t try to interfere with court-ordered child support or alimony by deducting things from your court-ordered payments. It is also not a good idea to take the extracurricular expenses out of child support or alimony.
- Decide who is to be legally responsible for things like medical insurance, for instance. The person who carries the insurance is the one who is billed.
- College expenses should be handled separately. Parents should plan for when the children are over 18 and out of the court jurisdiction and make post-high school education plans accordingly. Parents should work this out separately from the childcare expenses.
Kathy Minella reviews three different methods for dividing child care expenses:
- Using the Income Shares Formula: Each state has its own method for calculating the amount each parent must pay for childcare costs, but it is usually divided in half.
- A Needs and B Needs: Parents divide costs into 2 groups. A Needs are those that are regularly occurring such as housing, food, clothing, health products, etc. B Needs are things like party gifts, health coverage, school supplies, extracurricular activities, etc. Usually, A Needs are covered in the regular child support. With B Needs, sometimes parents agree to contribute a certain percentage on a regular basis.
- Percentage of Income Model: A newer way to calculate the share each parent should contribute is to use a set percentage for the noncustodial parent, regardless of the income of the custodial parent. Only about 20% of states use this method currently. The theory is that this will keep both parents involved in the child’s life.
Managing the hidden costs after a divorce can be difficult as many can attest to.
Tracy Stewart suggests that parents should start to learn the skills to work cooperatively with the decision-making process and the finances for their kids. Decide from the onset who will pay for the extracurricular activities (lessons, sports, travel, education, parties, etc.)
Sometimes it is necessary to use a third-party mediator or Parent Coordinator. “Parenting Coordination is a child-focused alternative dispute resolution process in which a mediation-trained and experienced mental health or legal professional help parents resolve parenting disputes. These professionals are required to have extensive practical experience with high conflict or litigating parents.” The costs for using a Parent Coordinator can be much less than repeatedly hiring an attorney and going to court to resolve child related financial issues.
Childcare expenses and taxes are another issue that you should be aware of. Cynthia Myers gives a brief synopsis and how a Child Care Tax Credit might work for you.
The Child and Dependent Care Credit is designed to allow you to deduct certain expenses you incur for childcare on your taxable income. A credit is not a deduction and “directly reduces your adjusted gross income.” As with any credit or deduction from the IRS, there are certain criteria that you need to meet in order to be able to claim this credit:
- You need to directly pay for childcare
- You need child care in order to work
- It can’t be paid to your spouse, the child’s parents
- You need to have earned income
- You file “Married Filing Jointly” or “Head of Household”
- Provide the name, address, and SSN of the child care provider
For parents of divorce, they can take turns claiming the child a dependent on their tax returns. However, the Child Care Tax Credit rules are different. You need to meet their definition of custodial parent. If you meet that definition, then you can take the Child Care Credit even if the child is not claimed as a dependent on your tax returns.
If you want to share in taking this Child Care Tax Credit, then you need to mutually agree to switch custody each year. The total number of nights the child spends in your home determines who is the custodial parent. Switching off each year requires some measure of coordination and cooperation by both parents. Of course, you should always seek legal and tax advice from a professional who can give you the best advice for your circumstances.
Melissa Heinig offers some additional information about taxes and your child support. First, your legal divorce judgment must specifically say that the funds are for child support. Child support and alimony cannot be together in a judgment or be called family support or spousal support. Remember that after December 31, 2018, neither spouse can claim alimony or spousal support as income or as a deduction.
Some general guidelines for claiming the child as a dependent:
- Children must be under the age of 17 at the end of the tax year.
- Lived with you for the last 6 months of the tax year
- You provide at least 50% of the child’s financial support
- Only one parent can claim a child as a dependent. A special form can be completed if both parties agree to have the noncustodial parent claim the child as a dependent.
You might be able to deduct some childcare expenses on your tax return. The IRS stipulates that you must meet a certain income level. Not all expenses will be allowed, however. Remember that the IRS can take your refund and send it to a state agency for any past due child support.
Again, it is always best to seek the advice of a tax professional or divorce attorney to get the help that is best for you.
Kay Bell reviews some of the details of using a Child Care Tax Credit:
- Some of the care services that may be eligible for the Child Care Tax Credit are summer camp, private home nurses, licensed dependent-care centers, nursery school and kindergarten costs, household help. The care providers must meet certain criteria as well.
- There are limits to the credit that can be claimed – up to $3000 for one child and $6000 for two or more. A certain percentage of the actual costs that can be claimed. Maximum child/dependent-care credit is $1050 for one, $2100 for two. The percentage varies from 35 percent to 20 percent depending on your income level.
- Your child must be a dependent on your taxes for you to pursue the Child Care Tax Credit. The IRS sets standards for who may qualify as a dependent and there are some exceptions that may apply to you.
- Only working parents can claim a Child Care Tax Credit and only if the child care was necessary for the parent to be able to work. The filing status is also a consideration. You must file single, head of household, married filing jointly or qualifying widow or widower with a dependent child.
- Some companies offer a benefit that may assist you with childcare costs while you work. This must be reported and taken into consideration when applying for the Child Care Tax Credit. It is best to consult with your tax professional to assist you in completing this portion of your federal taxes.
- The different authors, researchers, and experts have provided some sound advice about how to manage childcare expenses after a divorce. Certainly, establishing a positive relationship with your co-parent is one of the basic aspects of managing childcare expenses. Being able to discuss how you both will handle these expenses will only prove to be an asset going forward. Being able to work out unexpected expenses or unexpected changes in one parent’s income will again be a strong asset as you navigate through co-parenting.
- Seeking professional assistance with financial matters can be of great help. Financial professionals will be aware of the options available, your specific needs and hopefully the needs of your children. Tax experts will also be able to help you prepare your taxes and hopefully take advantage of the Child Care Tax Credit. Finally, seeking the help of a professional may help you and your co-parent work through some financial issues that may be difficult to address on your own.