Taking into Consideration the Dependency Exemptions / Credits During a Divorce
Please note that we are not tax attorneys and therefore the below is informational only when working towards a divorce agreement. Ultimately, all deductions or tax credits associated with a dependent is governed by the rules and regulations of the Internal Revenue Service and the applicable State taxing authorities.
It is common practice during a divorce to assign the dependency exemptions / credits to a single party in the action, or to share them by alternating years between the parties. It has recently come to our attention that simply assigning the dependency exemptions to a single party following a divorce is not sufficient. When drafting the final Agreement, the following should be taken into consideration.
There are Five Main Tax Benefits that Follow a Child Dependent:
Dependent Exemptions
1. Dependent Exemption
2. Child Tax Credit
When an agreement says the non-custodial parent gets the dependents in a certain tax year, the custodial parent must fill out and provide to the other parent a signed copy of IRS form 8332. Keep in mind, the IRS form 8332 only transfers the Dependent Exemptions including the Child Tax Credits. All other credits accompany the Custodial Parent.
1. Dependent Exemption
For tax years 2018 to 2025, the dependency exemption is $0. However, the child tax credit is actually worth more than a dependency exemption because a credit against tax is better than a deduction against income.
2. Child Tax Credit
The child tax credit goes hand-in-hand with the dependency exemption, which means that it can be assigned (using IRS Form 8332). It requires the following:
a. The child must be under age 17 to get the $2,000 credit, but children over 16 can get a $500 credit;
b. The child must be the taxpayer’s natural or adopted child or grandchild; and,
c. The child must not be self-supporting (parent must provide more than 50% of child’s needs).
The Child Tax Credit is awarded to the parent who claims the child’s Dependency Exemption.
Custodial Parent
3. Dependent Care Credit
4. Head of Household
5. Earned Income Credit
If the parents have not agreed to a 50 / 50 timeshare, the custodial parent is the parent that has the child more than 50 percent of the time during the year. If the parents have agreed to a 50/50 timeshare, the parents can equally split these credits, in an agreement, by defining which parent is to claim them in any given tax year.
3. Child and Dependent Care Credit
This credit equals 20% to 35% of what you spend on child care so you can go to work or leave home to look for a job. The exact percentage depends on your income and how many child dependents you have who need care. It’s a portion of up to $3,000 in care costs if you have one child, or $6,000 if you have two or more children.
Your dependents must be under age 13 and young enough to require supervisory care while you are away from home.
4. Head of Household Filing Status
Qualifying as head of household entitles you to a larger standard deduction than you would receive if you filed as single, $18,000 rather than $12,000 for single filers as of 2018, going up to $18,350 in the 2019 tax year. And, it requires that you have at least one dependent/qualifying child.
In addition to being able to claim a dependent, you must be “considered unmarried” to file as “head of household”. Meaning you are either single or you did not live with your spouse at any time during the last six months of the year.
You must also have paid more than half the expenses of maintaining your home during the tax year.
5. Earned Income Credit
You must have earned income to qualify. Your qualifying dependents must be children who are no older than age 19 at the end of the tax year, or age 24 if they are still in school.
This information was pulled from IRS Publications 501 & 504: (https://www.irs.gov/pub/irs-pdf/p501.pdf & https://www.irs.gov/pub/irs-pdf/p504.pdf)
