If you filed taxes together with your spouse when you were married, you claimed the kids as dependents without even thinking about it. But now that you are planning to divorce, who gets to claim kids on taxes and take that all-important exemption?
For tax year 2016, the dependent exemption is $4,050. For every dependent you are able to claim on your income taxes, your taxable income is reduced by that amount. Put another way, if you are in the 25% tax bracket, each dependent you claim reduces the tax you owe by about a thousand dollars. If you are claiming multiple children and you qualify, this is a significant financial benefit.
As a general rule, the parent who has physical custody of a child gets to claim the child as a dependent. If your divorce decree is silent about the issue of who gets to claim the exemption, and one parent has primary physical custody, that parent will get to claim the child. However, the parent with the right to claim the dependent exemption can release it to the other parent. This may be a good idea if the non-custodial parent is in a higher tax bracket and would benefit more from claiming the exemption.
In order for the non-custodial parent to claim the child as a dependent, the custodial parent must release the exemption using IRS Form 8332. The parent who would have been entitled to the exemption executes the form, and the other parent files it with their tax return. If the parent claiming the exemption files electronically, which an increasing number of people are doing, Form 8332 must be filed along with IRS Form 8453.
What if parents share joint custody, and each parent has the kids about half the time? This is a common scenario. In that case, a judge may order (or parents may agree to) an arrangement in which parents claim the children in alternate years, or each parent claims one child.
While a custodial parent can release their claim to the dependent exemption for a child, that doesn't mean the non-custodial parent can get all child-related tax benefits. The Earned Income Credit (EIC) is one example. The EIC amount depends on the claimant's income and number of children. In order to claim this credit on the basis of a qualifying child or children, there is a residency requirement. For a parent to claim the EIC, the child must have lived with that parent in the U.S. for more than half of the year. (Temporary absences are allowed.)
The Child Tax Credit is worth up to $1000 per child for tax year 2016. There are seven qualifying rules for the Child Tax Credit, one of which is that the child must have lived with you for at least half the year. (There are some exceptions for divorced and separated parents.) As a general rule, the custodial parent receives this credit, regardless of which parent claimed the dependency exemption.
Before claiming an exemption, deduction or credit, it's always a good idea to review IRS regulations on exemptions and deductions and to speak with your tax preparer or accountant to understand the risks and benefits. There is a lot of helpful information on the IRS website that pertain to children and divorce and we would encourage you to capitalize on this valuable resource.
While we cannot offer tax advice, if you have questions about divorce or custody and how your finances may be affected at tax time or throughout the year, we invite you contact the Law Office of Shelly M. Ingram, LLC to schedule a confidential office consultation.