Divorce and Claiming Children as Dependents for Income Taxes

201411.03
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A common question in many cases where the parties have children is: how are the tax exemptions for children handled after divorce? Below are some basic points to consider.

IRS Rules – Which parent can claim the child as a dependent?

Generally speaking, under IRS rules, the exemption would go to the custodial parent (i.e. the parent with whom the child lives most of the year). If the child is with each parent for an equal amount of time during the year, then the exemption would go to the parent with the highest adjusted gross income.

However, the custodial parent who is entitled to the exemption may complete IRS Form 8332 which waives the custodial parent’s right to the exemption and would allow the non-custodial parent to claim it.

How the Court hearing your divorce can weigh in on the child dependency exemption.

As a general concept, state courts cannot tell the IRS what to do when it comes to federal rules about income taxes. So looking at the IRS rules alone, it might seem that the non-custodial parent is out of luck (unless the custodial parent chooses to execute a waiver). But while the state court cannot tell the IRS how to handle the child dependency exemption, it can tell the parties. Virginia Code Section 20-108.1(E) states:

…the court shall have the authority to and may, in its discretion, order one party to execute all appropriate tax forms or waivers to grant to the other party the right to take the income tax dependency exemption for any tax year or future years, for any child or children of the parties for federal and state income tax purposes.

So, bottom line, the court can tell parents that they are required to execute a waiver of their claim to the exemption and allow the other parent to claim it. In many cases (though not all), some sort of alternation of the exemption may be ordered.

Be Aware of How Valuable the Exemption is to You.

At certain income levels, the exemption begins to phase out. For an example of the phaseout levels for 2013, click here.

Be Aware of How the Child Dependency Exemption may impact other entitlements.

  • Child Tax Credit: In order to be eligible for the child tax credit, you must claim the dependency exemption.
  • Child and dependent care credit: The child and dependent care credit is only available to the custodial parent. However the custodial parent does not have to claim the child dependency exemption to claim the child and dependent care credit.
  • Earned income credit: Only the custodial parent is eligible. However, the custodial parent does not need to take the dependency exemption in order to claim this.
  • American Opportunity Education Credit and Lifetime Learning Credit: These follow the dependency exemption.