By Kaleb Doyle, CPA, CFP® – Advisor
Developing and implementing a co-parenting expense sharing methodology after a separation can prove to be a difficult task, even with the most amicable of break-ups. It is critical that each parent considers as many expense scenarios as possible before the separation or divorce is finalized to help avoid future conflicts.
That said, having conversations ahead of time about tax, education and medical planning can prove instrumental in a successful co-parenting relationship as it helps alleviate strain on both parents and the child(ren). Further, being proactive and having conversations with both your attorney and financial advisor regarding best practices and what they recommend may prove beneficial and is highly recommended.
Consider the following steps when planning your child’s financial future should you and your partner choose to go your separate ways:
- Tax planning: There are several tax considerations when divorces and separations involve children. For starters, couples should consider who gets to claim the child(ren), therefore allowing them to claim the head of household filing status, which is much more advantageous tax-wise than filing as a single parent. If only one child is affected, the separated or divorced couple may want to consider alternating the years they claim the child to share tax benefits. However, in instances where a parent isn’t generating income it may not make sense for this particular parent to claim the child(ren) since they don’t receive any benefits because the child tax credit is partially refundable. If the parents acknowledge after the agreements have been signed that there’s more benefit for the one particular spouse to claim the child, the other spouse should complete IRS Form 8332 to release their dependency exemption claim for the child(ren). The filing of this form will switch which parent can claim the child for that tax year. When multiple children are involved, it may be more advantageous for each spouse to claim a child so both receive head of household filing status and reap additional tax benefits.
- Education planning: It’s best to have the financial responsibilities of each parent clearly spelled out in the divorce decree as to how educations expenses for elementary school, high school, and college will be treated. Perhaps it is decided from the start that both parents will equally split the cost of the in-state public college tuition, room and board, and if a child decides to pursue an out-of-state public college or a private college, it is known to them that they are only covered up to a certain cost and would be responsible for any overages. Figure the plan out for this ahead of time as you will not want to be going through these conversations after a child is far along in the college application process, or when scholarships, tuition and financial aid are also being determined. Another discussion to consider pertains to the cost-of-living expenses. Creating an account, such as a 529 plan, allows students to use money that has been saved over time to pay for certain college expenses. However, it’s important to be aware that sometimes one parent may want to fund more to the 529 plan or invest more aggressively than the other spouse desires. Therefore, it’s recommended that the 529 accounts be split at the time the divorce or separation is final rather than being handled together post-separation/divorce. Communication is another big player in educational planning for co-parents and must extend to the children involved. It’s the parents’ responsibility to make sure each child knows upfront how much of their higher education costs will be covered.
- Medical planning: Expenses associated with medical costs can be significant and should be negotiated upfront. If one parent has access to a quality health insurance group plan through their employer and the other does not, it would be more cost-effective to add the child to the plan with better health coverage. However, be mindful that this situation can change if a parent has a change in employment – if this happens, a new plan will need to be arranged.
The math of co-parenting can be tough, but it doesn’t all have to be a bumpy road. With proper planning in place before the separation or divorce is finalized, a more-harmonious co-parenting relationship can exist.
For further information on tips for navigating the shared expenses of raising a child after a separation or divorce, take a look at my conversation with Parents Magazine.
