When parents get separated or divorced, they must decide how to split the children’s tax deductions. The federal Tax Code supplies the default rules for allocating children’s tax deductions when parents cannot agree. Those regulations are identified and discussed in detail in Chapter 5 of my book, Frumkes & Vertz on Divorce Taxation. Knowing the rules can help to negotiate a settlement and ensure that the children’s tax deductions are not squandered or under-utilized.
- Children’s Dependency Exemption. The most common tax benefit associated with children is the children’s dependency exemption. In the absence of an agreement or court order, the dependency exemption for dependent children is allocated to the custodial parent. In cases where both parents qualify (i.e. equally shared custody), the parent with the greater adjusted gross income prevails, under Tax Code § 152(c)(4)(A). Together the parents (or at least one of them) must supply one-half of the child’s financial support.
- Child Tax Credit. The parent who actually claims the dependency exemption can claim the child tax credit, which is a $1,000 refundable credit. The child for must be under 17 years old on December 31. A taxpayer who files as head of household or married filing separately must earn “modified AGI” of less than $55,000 per year (inflation adjusted), after which the credit is phased out by $50 for each $1,000 of additional income.
- Child Care Tax Credit. By filing IRS Form 2441, a parent who files single, joint or head of household status (but not MFS) may deduct child care expenses for a dependent child who is under age 13, up to a maximum of $3,000 per child per year (or $6,000 maximum) if the child care was incurred for the purpose of pursuing gainful employment. The credit is equal to 35% of the child care expense actually paid for taxpayers earning $15,000 or less. There is a phase out of 1% for each $2,000 of taxable income over $15,000, but the credit will not be less than 20%.
These are three of the most common children’s tax deductions. In contentious cases, it is common for parents to disagree about who will claim the children’s tax deductions, especially the dependency exemption. It is one of the most-litigated issues in tax court. If both parents claim the dependency exemption for the same child, the custodial parent will always win that battle. But, the custodial parent has the right to assign the dependency exemption to the other parent by signing an IRS Form 8332.
IRS Form 8332 is one of the most important tax forms for separated and divorced parents. It allows the custodial parent to assign the children’s dependency exemption to the other parent. The children’s tax deductions can be assigned for one or more tax years. When you read Chapter 5 of my book, you’ll see there are really no substitutes for the form. It must be signed by the custodial parent and stapled to the tax return of the other parent. When you negotiate a separation agreement or consent order, you should also sign an IRS Form 8332 if you are agreeing to allocate the children’s tax deductions. Sign the tax form when you sign your agreement, because it can become more difficult down the road.
For family law help in Western Pennsylvania, call me. I’m Brian Vertz, and for more than 25 years, I’ve all kinds of people with complicated child support and divorce issues. My law firm is a powerful team of lawyers dedicated to family law. In Pittsburgh and Western Pennsylvania, call me at 412-471-9000.