Ok some back story I pay child support to the mother directly. I was ordered to pay by the courts (this order was issued when we were not living together) how ever we have been living together for a few years and I claimed my daughter on my tax return last year and plan on doing it again this year.

What I want to know is how will this affect me. The mother and I live together and have been for years I pay "child support" and buy what ever is needed for the child, the mother is not working and wants to claim her on her tax return.

First lets talk about your filing satus. Since you are unmarried, if you provide more than half the cost of upkeep of the home you can file as Head of Household, using your daughter as the "qualifying child" for HoH filing purposes

As for claiming the child as a dependent - since the child lives with both you and the mother, and assuming that this has been the case for the entire year, then the person with the highest adjusted gross income (AGI) is the one who can claim the child as a dependent. For documentation of this see Pub 501, page 11-15. The tie breaker rules that apply in this case are on pages 14 & 15.

See: Pub 501

Thanks that helps a lot