30 Jan Children’s Dependency Exemptions Eliminated by New Tax Law
After April 15, 2018, parents who are separated, divorced or unmarried might not have to fight over their children’s dependency exemptions anymore. Congress passed a new tax law in December 2017 (the Tax Cuts & Jobs Act of 2017) that eliminates the children’s dependency exemptions, one of the tax benefits that historically provoked debate between estranged parents. The new law went into effect on January 1, 2018, but does not affect 2017 tax returns.
In place of a dependency exemption for each child, which is reduced to $0 in 2018, the new federal tax law raises the standard deduction to $12,000 for parents who are single or married filing separately; $18,000 for heads of household; and $24,000 for parents who file joint tax returns. The standard deduction is available to parents, regardless of how many children they have, who do not itemize their deductions on their tax returns. Parents who claim itemized deductions will not get to use the enhanced standard deduction.
Unlike the alimony tax deduction, which was repealed, the children’s dependency exemption was reduced to $0 for the tax years 2018 through 2025. It was not repealed. By reducing the exemption to $0, instead of repealing it, Congress avoided the need to modify other sections of the tax code that refer to the dependency exemption, such as head of household filing status and the child tax credit. In fact, § 11041(a)(2) of the Act (amending 26 U.S.C. § 151(d)) states: “For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section.’’
In other words, any other tax provision that requires a taxpayer to qualify for claiming the children’s dependency exemption will still carry that requirement, even though the dependency exemption confers no benefit. Head of household filing status, for instance, requires that the taxpayer must have a “qualifying child” under § 152 (c). Ordinarily, a “qualifying child” is the child of a parent who has custody more than half of the time (under § 152(c)(1)(B)). Yet, a child of parents who are divorced or separated for the last six months of the year may be treated as a “qualifying child” if the custodial parent signs IRS Form 8332 assigning the child’s dependency exemption to the noncustodial parent. 26 U.S.C. § 152(e)(2). Thus, it might be worthwhile to assign the children’s dependency exemptions, even if they have no value.
For tax year 2017, each dependency exemption is worth $4,050 per child on the parents’ federal income tax returns. The old law automatically allocates the tax deduction to the parent who has custody most of the time (or, in the case of equally-shared custody, to the parent who has greater income). Still, parents may agree to allocate one or more of the children’s dependency exemptions to the noncustodial parent by signing IRS Form 8322. In fact, a family court may order a parent to assign the tax deduction to the other parent, in some cases.
The children’s dependency exemption is one of many tax issues that may affect divorced and separated spouses. In my family law practice, I help spouses resolve complex financial issues and tax problems. To schedule a callback with me, send me an email, call my law firm at 412-471-9000, or use the contact form.