Child Custody and Taxes
When you and your spouse decide to call it quits, you’re more worried about you’re your children will think than what the IRS will think. That’s only natural -- when parents are dealing with custody issues, often the furthest thing from their minds is how it will affect their tax status. But if you want to avoid serious tax penalties, or reap significant tax benefits, it’s better to figure it out sooner than later. Here is a brief introduction to how child custody can affect you and your ex’s tax status.
What Benefits Are Available For Claiming a Dependent Child
There are numerous standard tax benefits to claiming a child as a dependent:
- The exemption for the child;
- The child tax credit;
- Head of household filing status;
- The credit for child and dependent care expenses;
- The exclusion from income for dependent care benefits; and
- The earned income credit.
However, the rules are more complicated for divorced or separated parents. If you claim your child as a dependent, you cannot split these benefits with the other parent, even by your own agreement.
Can Both Parents Claim a Dependent Child?
The dependency exemption cannot be split. Generally, the custodial parent is treated as the parent who provided more than half of the child's support. This parent is usually allowed to claim the exemption for the child if the other exemption tests are met. However, the noncustodial parent may be treated as the parent who provided more than half of the child's support if certain conditions are met.
The custodial parent can sign a Form 8332 Release of Claim to Exemption for Child of Divorced or Separated Parents, or a substantially similar statement, and provide it to the noncustodial parent who attaches it to his or her return. Please beware that if the custodial parent releases the exception, the custodial parent may not claim the Child Tax Credit.
How Does the IRS Decide Which Parent Gets the Benefits?
To determine which parent can treat the child as a qualifying child in order to claim tax benefits, IRS rules employ the following tiebreakers:
- If only one of you is the child's parent, the child is treated as the qualifying child of the parent;
- If you do not file a joint return together but both of you claim the child as a qualifying child, the IRS will choose the parent with whom the child lived for the longer period of time during the year. If the child lived with both of you for the same amount of time, the IRS will choose the parent who had the higher adjusted gross income (AGI) for the year;
- If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year;
- If a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year.
How Do Court Custody Orders Affect Deductions?
IRS Publication 504 covers who may claim a dependency exemption, and how, following a divorce or separation. Regardless of what the custody orders the court has issued, federal law determines your federal tax status. Therefore, the IRS requirements supersede a county or state court order.
It is never easy navigating child custody or tax matters. You might find it valuable to talk with an experienced tax attorney or child custody attorney about your particular case. If you would like more general custody information, you can visit FindLaw’s child custody section or tax law section.