As spouses finalize their divorces, agreements are usually reached as to how the parents will account for their child on their separate individual income tax returns.
Here are five things you need to know about child-related deductions and tax credits:
1. It doesn’t matter which parent provides the greater amount of financial support.
In recent years, the support test has been replaced by what is called the “place-of-abode” test. The child must still receive more than half of his or her support from the parents in order to qualify as an exemption, but the parent with whom the child resides with most of the year will be the parent who may claim the child, assuming that all other qualifications are met.
2. The non-custodial parent may claim a child.
The qualifying non-custodial parent may claim the dependency exemption if the divorcing couple is in agreement, but that parent must attach a Form 8332 to their federal tax return. The form will include the signature of the custodial parent releasing their right to claim the child. Reliance on the agreement itself without the signed form may result in a denial of the deduction and related child tax credit.
3. The parent who qualifies as head of household does not need to claim the dependent child to file as head of household.
These days many parents have “shared parenting time,” which is a 50-50 arrangement. But, because there are 365 days in a year, it could be argued that one parent, or the other, had physical custody of the child for one additional night.
4. Credits and benefits are still available to the custodial parent who releases the dependency exemption.
Therefore, the parent who is considered the custodial parent by the Internal Revenue Service (IRS) still may claim the credits for child care expenses and the earned income credit, even if they do not claim the child on their return.
5. The agreements do not apply once the child reaches the age of majority.
When a child reaches the age where he/she is considered to be an adult, then he/she is no longer considered in custody of either parent. Facts and circumstances of the previous year will determine whether that child may be considered a dependent for tax purposes, but the child is no longer under the rules of the divorce agreement.
The most common misconception that I hear is from the parent who says, “I pay child support; so I can claim him on my taxes.” And that statement is not necessarily true. Once again, because the support test was replaced by the “place of abode” test, it no longer matters which parent provides the larger amount of support, but rather, where the child lives most of the time.
A divorce financial professional can help you make informed decisions about child-related deductions before tax season arrives.
How will you and your ex-spouse decide who will claim the child(ren) as exemptions on their tax returns?
Susan A. Moussi, CPA, CFP®, CDFA, CFT SMD Tax & Divorce Financial Planning Consultants, Inc. Phone: 614.429.4172