If you are not the custodial parent – and not entitled to claim the dependency exemption via Form 8332 – but you are required to pay the college expenses of your child as a condition of a divorce decree or agreement, part of the tuition you pay could go directly into the pocket of your ex-spouse.
If you cannot claim your child as a dependent on your tax return you cannot claim the HOPE or LIFETIME LEARNING education tax credit, or the above-the-line deduction for tuition and fees, for any qualifying college expenses you pay.
If your ex-spouse claims the child as the custodial parent he/she can also claim the appropriate educational credit or deduction, subject to the normal AGI limitations, and receive a “reimbursement” from Uncle Sam for monies that came out of your pocket. This could add up to $10,000 for 4 years of college (spread out over 5 calendar years) – more if graduate school is included.
Actually, in many cases the AGI of the non-custodial parent making the tuition payments is such that he/she would not be able to claim any credit or deduction even if it were available, while the custodial parent, with alimony as the only source of taxable income, is in a position to claim the maximum benefit.
The moral of the story is to make sure you take the potential education tax benefits into consideration when you are negotiating your settlement agreement.
That’s enough about divorce for a while. Any questions?