Some of the financial issues implicated by child custody arrangements and court orders are (1) child support payments; (2) payment for health insurance; and (3) the ability to claim the child or children as dependents for tax purposes. The Internal Revenue Service (IRS) rules dictate that the parent with whom the child spent the most nights during the tax year has the right to claim the child as a dependent. And if the child spends an equal number of nights with each parent during the tax year, the parent with the higher adjusted gross income (AGI) has the right to claim the child as a dependent. Sometimes the child custody court will order the parents to alternate years of claiming the child as a dependent.

In Colorado, as in other states, child custody arrangements and court orders can significantly impact financial responsibilities. Child support payments are determined based on a formula that considers the income of both parents, the number of children, and the time each parent spends with the children. Health insurance for the child is typically required to be provided by one or both parents, and the cost may be factored into the child support calculation. Regarding tax implications, the IRS rules state that the custodial parent, defined as the parent with whom the child spent the most nights during the year, is generally entitled to claim the child as a dependent. If the child spends an equal number of nights with each parent, the parent with the higher AGI is entitled to the claim. However, Colorado courts may order parents to alternate the years they claim the child as a dependent, which overrides the IRS rule. This arrangement should be clearly outlined in the custody agreement or court order and may require the custodial parent to sign IRS Form 8332 to release the exemption to the non-custodial parent.