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If you are a divorced or separated parent, a commonly encountered but often misunderstood issue is who claims the child or children for tax purposes. This is sometimes a hotly disputed issue among parents; however, tax law includes specific but complicated rules about who profits from child-related tax benefits. At issue are several benefits, including the children’s dependency, child tax credit, child care credit, higher-education tuition credit, earned income tax credit, and, in some cases, even filing status.
This is one of the most complicated areas of tax law, and inexperienced tax preparers or taxpayers preparing their returns can make serious mistakes, especially if the parents need to communicate better. If parents cooperate, they often can work out the best tax result overall, even though it may not be the best for them individually, and compensate for it in other ways.
Physical Custody (Custodial Parent) – If a family court awards physical custody of a child to one parent, tax law is particular in awarding that child’s dependency to the parent with physical custody, regardless of the amount of child support provided by the other parent. However, by completing the appropriate IRS form, the custodial parent may release that dependency to the noncustodial parent for tax purposes. The release can be granted yearly 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 several 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 with themselves on who will claim the child, 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 more significant number of nights during the tax year; or if the child lives 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 regarding who can claim a child’s dependency take 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 (through 2025) a monetary tax deduction (also referred to as an exemption allowance) for a dependent child, it still matters who claims the child as a dependent because certain tax credits are only available to the taxpayer claiming the child as a dependent.
Head of Household Filing Status – An unmarried parent can claim the more favorable head of household, rather than single, filing status if they are the custodial parent who pays more than half of the costs of maintaining their home, and this household 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 noncustodial parent.
Tuition Credit – If the child qualifies for either the American Opportunity or the Lifetime Learning higher-education tax credit, the credit goes to whoever claims the child as a dependent. Credits are significant tax benefits because they reduce the tax amount dollar-for-dollar. In contrast, deductions reduce income to arrive at taxable income, which is taxed according to the individual’s tax bracket. For instance, the American Opportunity Tax Credit (AOTC) provides a tax credit of up to $2,500, of which 40% is refundable. However, both education credits phase out for taxpayers with adjusted gross income (AGI) between $80,000 and $90,000 for unmarried taxpayers and $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 13 and dependent on the parent. However, a special rule for divorced or separated parents provides that if the custodial parent releases the child’s exemption to the noncustodial parent, the custodial parent can still qualify to claim the child care credit, and the noncustodial parent cannot claim it.
Child Tax Credit – A $2,000 credit is allowed for a child under 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 (under age 19 or a full-time student under age 24) the custodial parent has, up to a maximum of three children. Releasing the dependency of a child or children to the noncustodial parent will not disqualify the custodial parent from using the children to qualify for the EITC. 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 a custodial parent, you should consult with this office before deciding whether to release a child as a tax dependent.