Taxes can be confusing. They can be even more confusing when a divorce is involved. When divorcing parties have a child (or children), the confusion multiplies. You may wonder if you should fight to protect your child tax benefits in divorce.
First understand that a child can be claimed by one and only one taxpayer for any given year. So, divorced parents may not both claim the same child(ren) for tax purposes. So who may claim the child(ren) for tax purposes and when is something that should be considered during the divorce process.
Further, there is more than one type of child tax benefit available. In fact, there are six. The following are the six tax benefits related to children:
- The dependency exemption for the child.
- The child tax credit.
- Head of household filing status.
- The credit for child and dependent care expenses.
- The exclusion for dependent care benefits.
- The EITC (earned income tax credit)
Each of these benefits is unique. To claim these benefits, a person must show that he/she has a qualifying child. And, only one person may claim a particular child as a qualifying child. That person is then generally entitled to all 6 tax benefits for that child. This is mostly due to the fact that being eligible for many of these benefits for a particular child requires that a person claim the dependency exemption for that child (i.e. the first benefit listed above). So, even if both parents could pass the qualifying child test for a particular child, only one of them can claim that particular child. And once one of those parents claims the dependency exemption for a child he/she is the only parent eligible for the other benefits for that child. So, it generally becomes an all or nothing scenario.
QUALIFYING FOR CHILD TAX BENEFITS
Given that only one parent is generally eligible for all six child tax benefits, it is important to know what makes a parent eligible for these benefits. A parent is eligible for these benefits if a parent meets the IRS’s qualifying child test for that child. (A parent who meets the test for qualifying child is also called the custodial parent). The qualifying child test currently requires that the following four (4) tests (relationship, age, residency, and joint return) be met:
Relationship (the child must be one of the following):
- Son, daughter, stepchild, foster child, or a descendant of any of them (for example, your grandchild), or
- Brother, sister, half brother, half sister, stepbrother, stepsister, or descendent of any one of them (example niece or nephew).
Age (the child must be):
- Under age 19 at the end of 2013 and younger than you (or your spouse, if filing jointly),
- Under age 24 at the end of 2013, a student, and younger than you (or your spouse, if filing jointly, or
- Permanently and totally disabled at any time during 2013, regardless of age.
Your child must have lived with you in the United States for more than half of the applicable tax year.
To meet this test, the child cannot file a joint return for the year. (There are exceptions to this test).[ For further information or clarification of any of these please see IRS publication 596 which can be found at: https://www.irs.gov/pub/irs-pdf/p596.pdf ]
WHAT IF BOTH PARENTS MEET THE QUALIFYING CHILD TEST?
As you can see, test number 3 in the qualifying child test (residency) is critical in determining which parent will be able to call any one of the parties’ children a qualifying child after a divorce. A parent who has less than 50% physical custody cannot pass this test.
However, there are situations where both or neither of the divorced parents can meet the 4 tests for a particular child (e.g. parents who share joint physical custody with equal 50/50 parent-time may both meet the test). So, the IRS employs a tiebreaker test for these situations.
If only one of the persons is the child’s parent, the child is treated as the qualifying child of the parent.
If the parents file a joint return together and can claim the child as a qualifying child, the child is treated as the qualifying child of the parents.
If the parents do not file a joint return together but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of 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, but only if that person’s AGI is higher than the highest AGI of any of the child’s parents who can claim the child. If the child’s parents file a joint return with each other, this rule can be applied by treating the parents’ total AGI as divided evenly between them.[ For further information or clarification of any of these please see IRS publication 596 which can be found at: https://www.irs.gov/pub/irs-pdf/p596.pdf ]
As you can see, in situations where the parents share 50/50 physical custody it is generally the parent with the higher AGI (adjusted gross income) who may claim the child.
Once you have determined which parent meets the qualifying child test for a particular child, then you know which parent may claim the 6 tax benefits listed above. As addressed earlier, the person who meets the qualifying child test is generally entitled to all 6 benefits. However, it is possible for a court order (e.g. Decree or Settlement Agreement) to require a party to waive the right to claim an exemption. A person who is entitled by a court order to claim a child or children for exemption purposes but who is not the custodial parent (i.e. is not the person who passes the test for qualifying child), must have the other parent (i.e. ex-spouse) sign IRS Form 8332 to allow them to claim the exemption(s). (For Decrees that went into effect before 2009, the person may be able to attach a copy of the Decree or other court order instead of submitting IRS Form 8332 but for those that went into effect after that, the Form 8332 is required).
DESCRIPTIONS OF THE SIX (6) TAX BENEFITS RELATED TO CHILDREN
So, the question is what exactly are the 6 tax benefits, and are they worth fighting for in a divorce? The following is a brief description of the 6 tax benefits related to children.
The dependency exemption for the child:
The dependency exemption is a specific amount that the IRS sets out each year that a parent may deduct from his/her taxable income for each qualifying child.
The dependency exemption amount was $3,800 for 2012 and is $3,900 for 2013.
- So, for the 2013 taxes, a parent who takes this exemption is allowed to subtract $3,900 for each qualifying child from his/her taxable income.
HOWEVER, there is also an exemption phaseout each year. The phaseout reduces the amount that a parent may deduct if his/her adjusted gross income is more than a certain amount.
- For 2013, this amount is $150,000 for a married individual filing a separate return; $250,000 for a single individual; $275,000 for a head of household; and $300,000 for married individuals filing jointly or a qualifying widow(er).
So, the dependency exemption may not provide the same potential benefit to both parents.
The child tax credit.
The child tax credit is a specified amount that is “credited” towards the taxes that a parent owes. The parent receives this amount in credit for each qualifying child.
For 2013 it is $1,000 per qualifying child under the age of 17.
If the child tax credit amount exceeds the amount of taxes owed (e.g. parent owes $2,000 in taxes but is eligible to receive $3,000 in child tax credits because the parent has 3 qualifying children), the parent can receive some or all of the balance as a refund. This is known as the additional child tax credit (ACTC) or refundable child tax credit (CTC).
There is a phaseout that reduces the child tax credit amount when a parent’s adjusted income is greater than a specified amount just as there is a phaseout for the dependency exemption described above. The amount at which this phase-out begins varies depending on the parent’s filing status.
- In 2013: For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000.
- In addition, the Child Tax Credit is generally limited by the amount of the income tax a parent owes as well as any alternative minimum tax he/she may owe
To be eligible for the child tax credit, a parent must first claim the dependency exemption.
So, the like the dependency exemption, the child tax credit may not provide the same potential benefit to both parents.
Head of household filing status.
Filing as head of household, generally results in a person’s tax rate being lower than it would be if that person were filing as “single” or “married filing separately.” That person will also receive a higher standard deduction than if he/she filed as “single” or “married filing separately.”
To qualify a parent must:
- Be unmarried or considered unmarried on the last day of the year.
- Have paid more than half the cost of keeping up a home for the year.
iii. Have had a qualifying child living with him/her in the home for more than half the year (except for temporary absences, such as school).
The credit for child and dependent care expenses.
This benefit allows a parent to claim expenses related to child care paid by that parent while that parent was working or looking for work (e.g. day care).
The following test must be met:
- The care must be for a qualifying child who is under age 13.
- The parent (or the parent’s spouse, if filing jointly) must have earned income during the year.
iii. The parent must have paid someone for child care while that parent was working or looking for work.
- The person who was paid to provide child care must be older than 19 and may not be someone that the parent can also claim as a dependent.
A parent may claim up to $3,000 for one child or $6,000 for two children.
A parent does not have to claim the dependency exemption in order to claim the child and dependent care credit. HOWEVER non-custodial parents (parents who do not meet the test for qualifying child) cannot take any expense they pay for daycare as a deduction even if they take the dependency exemption. Childcare expenses may only be deducted by the custodial parent.
The deduction/exclusion for dependent care benefits.
A parent who receives dependent care benefits from his/her employer may deduct/exclude that benefit from his/her income. Some examples of these kinds of benefits are:
- Amounts a parent’s employer paid directly to either the parent or the parent’s child care provider for the care of the parent’s qualifying child while the parent worked,
- The fair market value of care in a daycare facility provided or sponsored by the parent’s employer, and
iii. Pre-tax contributions a parent made under a dependent care flexible spending arrangement.
For some parents these employer benefits may result in their dollar limit beingreduced for purposes of the credit for child and dependent care expenses (see benefit 4 above).
- This is because if a parent deducts/excludes a dependent care benefit amount from his/her income, that parent MUST also subtract that amount from the credit he/she is due for child care expenses.
Example: a parent with one child works for an employer that paid him/her $1,000 under a qualified dependent care benefit plan. The parent also paid $2,900 out-of-pocket for child care expenses. Even though in 2013 a parent may get up to $3,000 in credit for credit for child care expenses, this parent may NOT claim the entire $2,900 if the parent also subtracts the $1,000 dependent care benefit amount from his/her income. If the parent deducts/excludes the $1,000 from his/her income, then the parent MUST subtract the $1,000 from the $2,900 spent out-of-pocket on child care and only claim a $1,900 credit for child care expenses.
The EITC (earned income tax credit)
The earned income credit (EIC) is a tax credit for certain people who work and have earned income under a specified amount (for 2013 that amount is $51,567).
Like the child tax credit described above, any tax credit usually means more money in a person’s pocket by reducing the amount of tax that person owes. The EITC may also result in giving a refund
A parent is not required to take the dependency exemption to be able to claim the EITC. HOWEVER, only the custodial parent (parent who meets qualifying child test) is eligible.
In 2013, the maximum credit is $5891for three children or more, $5236 for two children and $3,169 for one child.
HOW DO I PROTECT MY RIGHT TO THE SIX (6) TAX BENEFITS RELATED TO CHILDREN? SHOULD I?
As you can see, these six (6) child tax benefits may not provide the same level of benefit to everyone. A parent who makes a substantial income may find that he/she is either not eligible for many of these benefits or that these benefits are minimal at best (e.g. due to phaseouts that reduce the benefit based on income). On the other hand, these benefits may provide that person’s ex-spouse a considerable benefit. The potential for the six (6) child related tax benefits to provide benefits to one or both parents should always be considered during the divorce process.
If you determine that these child tax related benefits could provide you a benefit, then it is important that you either: 1) make sure your child(ren) will be qualifying child(ren) for you (e.g. make sure that the child(ren) will spend at least half the year in your care); or 2) that you get the other parent to waive the right to these benefits in a Settlement Agreement or in your Decree of Divorce (however the latter means you will need to have the other parent sign form 8332 every year, unless or until that IRS requirement changes).
If, on the other hand, you determine that these child tax related benefits could provide theother parent (e.g. your soon-to-be ex-spouse) a greater benefit than it could provide you, then you could consider agreeing to waive the right to claim these exemptions with the agreement that he/she share the benefit they receive from these with you (i.e. either equally or to some other agreed upon proportion).
If, you determine that these child tax related benefits could potentially provide you greater benefit in some years and the other parent (e.g. your soon-to-be ex-spouse) a greater benefit in some years, it is not uncommon to include in a Decree of Divorce or Settlement Agreement that both parents will compute their taxes yearly and compare who will receive a greater benefit. Then the parent who will receive a greater benefit in a given year may “buy out” the right from the other parent that year based on the difference in the benefit each would receive.
If, however, you determine that these child tax related benefits probably could not ever provide you any (or perhaps very minimal) benefit, but that they could provide the otherparent (e.g. your soon-to-be ex-spouse) a benefit, then you may use your ability to waive the right to claim these exemptions as a bargaining chip in the divorce proceedings. It would be unwise under these circumstances to spend time and/or money fighting for these tax rights when they likely would not result in any (or else very minimal) benefit to you.
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