Dependent Exemptions, Child Custody & Divorce

Dependent Exemptions, Child Custody & Divorce

Parents getting divorced often want to know "who has the rightful claim to our child for income tax purposes?"  "Who gets the child exemption?" (which is often referred to as a "deduction").   To answer these questions, we have to first look to the IRS.  Their rules, though not too complicated,  can be confusing -- especially because some of their rules are soft (can be altered by tax payers) and some are hard (cannot be altered).   Also,  there are a lot of myths about the child exemption and other child-related benefits when it comes to divorce and child custody situations.  The questions and answers below are intended to answer the most often asked questions about the child exemption and other tax benefits that must be discussed in any divorce or custody situation where children are involved.

Q: What is a dependent exemption?

  • As applied to your child, the dependent exemption is an amount of money that you are permitted to subtract from your adjusted gross income.  The dependent exemption reduces the amount of income on which you will be taxed (in effect, an exemption operates the same as a deduction).
  • In 2016, the dependent exemption is $4,050 per child.  The right to claim exemptions, however, phases out at higher income levels.  In 2016, the phase-out begins at $259,400 for single parents and $285,380 for single parents who claim head of household status.

Q: How is the right to claim a child’s dependent exemption determined in a divorce or child custody situation?

  • Only one parent may claim a dependent child on his or her tax return in any given year. The parent who claims that child as his or her dependent is also the parent who claims that child’s dependent exemption.
  • According to the IRS, the default parent, in terms of claiming the dependent exemption for a child in a divorce situation, is the one with whom the child lives for greater than 50% of the time during that tax year.  (Note: The IRS refers to the parent with whom their child lives for greater than 50% of the year as the “custodial parent.”)
  • In 50%/50% custody situations, the default parent is the parent with the higher adjusted gross income.

 Q: Can the non-custodial parent ever claim a child’s dependent exemption on his or her tax return?

  • Yes. If the divorcing parents agree that the child’s dependent exemption may be claimed by the non-custodial parent, the IRS will allow this.
  • Such an agreement should be clearly stated in the parents’ Property Settlement Agreement (PSA) and Final Order of Divorce/Divorce Decree.
  • The custodial parent will need to complete and sign IRS Form 8332 each and every year that the non-custodial parent is permitted (by the PSA) to claim that child’s dependent exemption. The non-custodial parent must attach this form to his or her tax return every year that he or she claims that child’s dependent exemption.
  • Parents also have the option of alternating their child’s dependency exemption on an every-other-year basis, or as they otherwise agree.

Q: Are there other tax benefits that are attached to the child’s dependent exemption?

  • Yes. The parent who claims the child’s dependent exemption is also the parent who is eligible for the child tax credit (if applicable, depending on the parent’s income).
  • The parent who claims the child’s dependent exemption is also the parent eligible to claim that child’s educational tax credits, also known as college credits and, as of 2015 the American Opportunity Credit (if applicable, depending on the parent’s income and other factors)

Q: Are there tax benefits that remain with the custodial parent (despite the non-custodial parent claiming that child’s dependent exemption) in a divorce or child custody situation?

  •  Yes. The custodial parent remains the only parent eligible to claim the earned income tax credit.
  • Also, only the custodial parent (not necessarily the parent who claims that child’s dependent exemption) is eligible to claim the child and dependent care tax credit (also known as the day care credit).
  • Note: The same rules apply if a parent is eligible, through his or her place of employment, for a Flexible Spending Account (FSA).
  • If the parents share the child’s custody 50%/50%, the IRS defaults to the parent with the higher adjusted gross income, i.e., the parent with the higher adjusted gross income is treated as if he or she is the “custodial parent.”
  • In 50%/50% custody situations, parents often negotiate which one will have the custodial parent benefits for income tax purposes (as opposed to letting the IRS default dictate the outcome).
    • This is custom, but not specifically addressed by the IRS.
    • The IRS reasoning: There are 365 days in a year (an odd number).  Therefore, a true 50%/50% custody share is impossible.
    • NOTE:  Only one parent may claim the earned income tax credit and the child and dependent care tax credit.

Q: Which parent is eligible to file as Head of Household after divorce?

  • The head of household tax status, versus filing as “single,” often lowers your tax bill (but phases out at higher income levels).
  • Unlike the dependent child exemption, the right to file as head of household is not exchangeable between parents.
  • Only the custodial parent – the parent who cares for the child greater than 50% of the time – is eligible to file his or her taxes as head of household.
  • A parent who is single and has a dependent child living in his or her home may be eligible to file taxes as “head of household.
  • Head of household status often lowers your tax rate, thereby lowering your tax bill. .
  • If you claim the standard deduction (versus itemizing your deductions), that number will be higher, thereby lowering your tax bill. The specific criteria follows:

 ~ Your spouse did not live in your home for the last 6 months of the year for which the taxes are filed (this applies to parents who are separated, but  not yet divorced).

~ You will not be filing a joint return with your spouse (this applies to parents who are separated, but not yet divorced).

~ You paid over half the cost of maintaining your home for that tax year.

~ Your child lived in your home over half the year, i.e., you are the “custodial parent” (even if the other parent claims that child’s dependency exemption).

~ Your child is considered a “qualifying child”, meaning he or she has not turned 19 by the end of the tax year (if not a full-time student), or is younger than 24 at the end of the tax year (if a full-time student for at least 5 months during the tax year), or is permanently disabled.

  • In 50%/50% custody situations, parents often negotiate which one will have the right to file as head of household (as opposed to letting the IRS default – that only the custodial parent is permitted to file as head of household – dictate the outcome).
    • This is custom, but not specifically addressed by the IRS.
    • The IRS reasoning: There are 365 days in a year (an odd number).  Therefore, a true 50%/50% custody share is impossible.
    • NOTE:  Only one parent may file as head of household (as it related to a child).
    • With more than one child, in a 50%/50% custody situation, parents sometimes each care for a child greater than 50% of the time and, as a result, each parent is potentially eligible to file their taxes as head of household.

Q: At what age is a child no longer considered a “dependent” for dependent exemption purposes?

  • To qualify as a dependent, your child must be under the age of 19 on December 31 of the tax year in question.
  • However, if your child is a full-time student (as defined by his or her school), he or she may be your dependent for income tax purposes as long as he or she is under the age of 24 on December 31 of the tax year in question.
  • If your child is permanently and totally disabled, there is no age limit.