Dependency and Divorce: Child and Spousal Tax Deductions, Credits and Other Ramifications– June 14, 2017

Posted by Rachel Roan, CPA, MT

All may be fair game in love and war, but when it comes to divorce and separation, very specific rules apply — at least in the tax code. Beyond the family dynamic at issue, questions about who can claim a child or who can benefit from certain tax deductions and credits often come into play. Below is an overview of some of the most pressing tax issues to consider after a divorce or separation. 

Claiming a Child as a Dependent

Generally the custodial parent is the taxpayer who can claim the child on their tax return. The custodial parent is the one with whom the child lived with for the majority of the year. However, a noncustodial parent can claim the child as a dependent, instead of the custodial parent, IF: 

  • The parents are legally divorced, separated or have lived apart at all times during the last six months of the year,
  • The parent provided over one half of the child's support for the year,
  • The child is in the custody of one or both parents for more than half the year, and
  • The custodial parent signs Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, and the noncustodial parent attaches the signed Form 8332 to their return. 

If both child lives with both parents an equal amount of time, then the Tiebreaker Rules will apply for qualifying children: 

  • If parents are still legally married and file a joint return, the child can be claimed on the joint return as a qualifying child.
  • If the parents do not file a joint return, the child will be the qualifying child of the parent who had the higher Adjusted Gross Income (AGI) for the year. 

What happens if both parents claim the same child? 

  • The parent who files first will have no initial issues filing their return.
  • The parent who files second will not be able to e-file their return and will have to paper file. This will trigger the IRS to examine each return and apply the Tiebreaker Rules for claiming a child as a dependent. 

Alimony vs. Child Support

Alimony is the collection of payments made to a former spouse under a divorce or separation agreement. Alimony is deductible by the payer and is included in income by the receiving spouse.
 
Child support is a court-ordered payment typically made by the noncustodial parent to help support the financial needs of the child. Child support is not deductible by the payer and cannot be included as part of the receiving spouse’s income. 

Tax Credits

Child Tax Credit
The Child Tax Credit is a credit for people who have a qualifying child; the credit can be up to $1,000. To qualify for the credit you must have a qualifying child who: 

  • Is under 17,
  • Is a U.S. citizen, U.S. national, or  U.S. resident alien,
  • Lived with you for more than half of the year, and
  • Is claimed as a dependent on your return. 

Noncustodial parents may claim this credit if the custodial parent releases the dependency exemption to the noncustodial parent, even if the child did not live with this parent for more than half of the year.
 
The Child Tax Credit may be limited by your AGI. For single and head-of-household filing individuals, the phase-out begins at $75,000 and is limited to no more than the taxpayer's total tax liability including AMT.
 
Child and Dependent Care Credit
The Child and Dependent Care Credit is available to parents who pay expenses for the care of a qualifying individual under the age of 13 while working or looking for work: 

  • Only the custodial parent can take this credit. It’s important to note that custodial parents can take the credit even if they have released the dependency exemption to the noncustodial parent.
  • The custodial parent can include up to $3,000 of dependent care expenses for one child or a maximum of $6,000 for two or more children to calculate the tax credit.
  • Care provider information must be disclosed on the custodial parent's tax return, including their Taxpayer Identification Number, and must not be a spouse, parent of the child, their child under the age of 19 or a dependent that can be claimed as an exemption on their return.
  • There is an exemption to the age limitation for a qualifying individual. A qualifying individual can be over 13 if they are physically or mentally incapable of self-care, lived with you for more than half of the year, and is your dependent or could be your dependent except that they had income over the exemption amount. 

Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a credit for low- to moderate-income individuals with earned income. Only the custodial parent can use the child to qualify for the EITC. The EITC rules do not have exceptions for the residency requirement; children must live with you for more than half of the year to qualify as a qualifying child. 

Head of Household

Selecting head of household on your individual tax return, compared to filing as a single filer, can provide lower tax rates to unmarried taxpayers who pay for more than half the cost of maintaining the home for the filing year and have a qualifying person living with them for more than half of the year. A qualifying child or relative claimed as an exemption will count as a qualifying person. 
 
It’s clear that an individual’s tax situation changes as a result of divorce and separation, as it often does during and after any major life event. Consult with your tax team to help ensure you are complying with the tax code and maximizing your tax opportunities. 

Contact Rachel Roan at rroan@cohencpa.com or a member of your service team for further discussion.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.