Wondering who gets to claim the children’s tax benefits if you are a divorced or separated parent? While the question is common, the answer of who claims the child or children for tax purposes is often misunderstood. Often this is a hotly disputed issue between parents. However tax law includes specific but complicated rules about who profits from the child-related tax benefits. At issue are a number of children’s tax benefits. These include the following:
- children’s dependency,
- child tax credit,
- child care credit,
- higher-education tuition credit,
- earned income tax credit,
- and, in some cases, even filing status.
Who claims the children’s tax benefits is actually one of the most complicated areas of tax law. And taxpayers preparing their own returns can make serious mistakes, especially if the parents are not communicating well. If parents will cooperate with each other, they often can work out the best tax result overall. Even though results may not benefit them individually, clear communication with your tax preparer can help compensate in other ways.
Consider these items regarding children’s tax benefits
Physical Custody (Custodial Parent)
If a family court awards physical custody of a child to one parent, tax law is very specific in awarding that child’s dependency to the parent with physical custody. This is regardless of the amount of child support provided by the other parent. However, the custodial parent may release that dependency to the non-custodial parent for tax purposes. To do so, they must complete the appropriate IRS form. The release can be granted on a yearly basis or for multiple years at one time. But once made, it is binding for the specified period.
CAUTION – The decision to relinquish dependency should not be taken lightly, as it impacts a number of tax benefits.
Joint Custody
On the other hand, if the family court awards joint physical custody, only one of the parents may claim the child as a dependent for tax purposes. If the parents cannot agree between themselves as to who will claim the child and the child is actually claimed by both, the IRS tiebreaker rules will apply. Per the tiebreaker rules, the child is treated as a dependent of the parent with whom the child resided for the greater number of nights during the tax year. Or if the child resides with both parents for the same amount of time during the tax year, the parent with the higher adjusted gross income will claim the child as a dependent.
Parents in the process of divorcing should be aware that for tax purposes, the IRS’s rules as to who can claim a child’s dependency takes precedence over what a divorce decree says or what a judge may have ruled. So, for example, if the family court awards full custody of a child to Parent A but says that Parent B can claim the child as a tax dependent, the IRS’s position is that the child is a tax dependent of Parent A unless Parent A releases the dependency to Parent B, as explained above.
Child’s Exemption Allowance
While there is no longer a monetary tax deduction for a dependent child, it still matters who claims the child as a dependent. This is because certain tax credits are only available to the taxpayer claiming the child as a dependent. This tax deduction is also referred to as a child’s exemption allowance.
Head of Household Filing Status
An unmarried parent can claim the more favorable head of household, rather than single, filing status if he or she is the custodial parent and pays more than half of the costs of maintaining, as his or her home, a household that is the child’s principal place of abode for more than half the year. This is true even when the child’s dependency is released to the non-custodial parent.
Tuition Credit
If the child qualifies for either the American Opportunity or the Lifetime Learning higher-education tax credit, the credit goes to whomever claims the child as a dependent. Credits are significant tax benefits because they reduce the tax amount dollar-for-dollar. Deductions however, reduce income to arrive at taxable income, which is then taxed according to the individual’s tax bracket. For instance, the AOTC provides a tax credit of up to $2,500 of which 40% is refundable. However, both education credits phase out for taxpayers with higher adjusted gross income (AGI). The specific amounts are between $80,000 and $90,000 for unmarried taxpayers. And the amounts are $160,000 and $180,000 for married taxpayers.
Child Care Credit
A nonrefundable tax credit is available to the custodial parent for child care while the parent is gainfully employed or seeking employment. To qualify for this credit, the child must be under the age of 13 and be a dependent of the parent. However, a special rule for divorced or separated parents provides that if the custodial parent releases the child’s exemption to the non-custodial parent, the custodial parent can still qualify to claim the child care credit, and it cannot be claimed by the noncustodial parent.
Child Tax Credit
A $2,000 credit is allowed for a child under the age of 17. That credit goes to the parent claiming the child as a dependent. However, this credit phases out for higher-income parents, beginning at $200,000 for unmarried parents and $400,000 for married parents filing jointly.
Earned Income Tax Credit (EITC)
Lower-income parents with earned income (wages or self-employment income) may qualify for the EITC. This credit is based on the number of children the custodial parent has, up to a maximum of three children. Children must be under age 19 or considered a full-time student if under age 24. Releasing the dependency of a child or of children to the noncustodial parent will not disqualify the custodial parent from using the children to qualify for the EITC. In fact, the noncustodial parent is prohibited from claiming the EITC based on the child or children whose dependency has been released by the custodial parent.
As you can see, some complex rules apply to the tax benefits provided by the children of divorced parents. It is highly recommended that you consult this office to prepare your return. If you are the custodial parent, consider consulting with this office about these rules. Also be very cautious before deciding whether to release a child as a tax dependent. Please call us with questions.
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