Chandler, Arizona
1807 E. Queen Creek Road
Chandler, AZ 85286
480-732-9898

If you are a divorced or separated parent with children, a commonly encountered but often-misunderstood issue is who claims the child or children for tax purposes. November 14, 2016

If you are a divorced or separated parent with children, a commonly encountered but often-misunderstood issue is who claims the child or children for tax purposes., Chandler, Arizona

If you are a divorced or separated parent with children, a commonly encountered but often-misunderstood issue is who claims the child or children for tax purposes. This is sometimes a hotly disputed issue between parents; however, tax law includes some very specific but complicated rules about who profits from the child-related tax benefits. At issue are a number of benefits, including the children’s dependency tax exemption, child tax credit, child care credit, higher-education tuition credit, earned income tax credit, and in some cases even filing status.

This is actually one of the most complicated areas of tax law, and serious mistakes can be made by taxpayers preparing their own returns or inexperienced tax preparers, especially if the parents are not communicating well. Where parents will cooperate with each other, they often can work out the best tax result overall, even though it may not be the best for them individually, and compensate for it in other ways.

Where a family court awards physical custody of a child to one of the parents, tax law is very specific in awarding that child’s dependency to the parent with physical custody, regardless of the amount of child support provided by the other parent. However, the custodial parent may release the dependency (exemption) to the non-custodial parent by completing the appropriate IRS form.

CAUTION - The decision to relinquish the dependency should not be taken lightly, as it impacts a number of tax benefits.

On the other hand, if the family court awards joint physical custody, only one of the parents may claim the child as a dependent for tax purposes. If the parents cannot agree between themselves as to who will claim the child and the child is actually claimed by both, the IRS tiebreaker rules will apply. Per the tiebreaker rules, the child is treated as a dependent of the parent with whom the child resided for the greater number of nights during the tax year, or if the child resides with both parents for the same amount of time during the tax year, the parent with the higher adjusted gross income claims the child as a dependent.

Child’s Exemption - The parent who claims the child as a dependent is entitled to the child’s tax exemption – which is actually a deduction from income of $4,050 in 2016. However, the exemption begins to phase out for higher-income taxpayers with an AGI of $259,400 for single taxpayers, $285,350 for those qualifying for head of household filing status and $311,300 for married taxpayers filing jointly.

Head of Household Filing Status – An unmarried parent can claim the more favorable head of household, rather than single, filing status if the parent is the custodial parent and pays more than one-half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one-half the year for that child. This is true even when the child’s dependency (and therefore the $4,050 exemption deduction) is released to the non-custodial parent.

Tuition Credit – If the child qualifies for either the American Opportunity or the Lifetime Learning higher-education tax credit, the credit goes to whoever claims the child’s exemption. Credits are significant tax benefits because they reduce the amount of tax dollar-for-dollar, while deductions reduce income to arrive at taxable income that is then taxed according to the individual’s tax bracket. For instance, the American Opportunity Tax Credit (AOTC) provides a tax credit of up to $2,500, 40% of which is refundable. However, both education credits phase out for higher-income taxpayers. For instance, the AOTC phases out between $65,000 and $80,000 for unmarried taxpayers and $130,000 and $160,000 for married taxpayers.

Child Care Credit - A nonrefundable tax credit is available to the custodial parent for the care of the child while the parent is gainfully employed or seeking employment. To qualify for this credit, the child must be under the age of 13 and be a dependent of the parent. However, a special rule for divorced or separated parents provides that where the custodial parent releases the child’s exemption to the non-custodial parent, the custodial parent would still qualify to claim the childcare credit, and it cannot be claimed by the noncustodial parent.

Child Tax Credit – A credit of $1,000 is allowed for a child under the age of 17. That credit goes to the parent claiming the child as a dependent. However, this credit phases out for higher-income parents, beginning at $75,000 for unmarried parents and $110,000 for married parents filing jointly.

Affordable Care Act – Parents must keep in mind that where the child does not have medical insurance during periods of the year, the parent claiming the child as a dependent (claims the $4,050 exemption) is the one responsible for any applicable penalties when the child does not have health insurance coverage.

Earned Income Tax Credit (EITC) – Lower-income parents with earned income (wages or self-employment income) may qualify for the EITC. This credit is based on the number of children (under age 19 or a full-time student under age 24) the custodial parent has, up to a maximum of three children. Releasing the dependency exemption to the noncustodial parent will not disqualify the custodial parent from using the children to qualify for the EITC. In fact, the noncustodial parent is prohibited from claiming the EITC based on the child or children whose exemption has been released by the custodial parent.

As you can see, there are some complex rules that apply to the tax benefits provided by children of divorced parents. It is highly recommended that you consult this office for the preparation of your return. If you are the custodial parent you should also consult with this office before making the decision to release a child’s exemption.

Call us TODAY! 480.732.9898

Other Announcements, Events and Deals from Steven M. Vogt, CPA
Financial Service Experts Explain How to Manage Personal Expenses as an Independent Contractor, Chandler, Arizona
Do you make your living as an independent contractor? If so, handling your personal finances goes hand in hand with running an efficient and successful business. Financial servi...read more
How Is a Bookkeeping Specialist Different From an Accountant?, Chandler, Arizona
As a small business owner, you know that an experienced accounting firm can help manage the company’s finances. However, you may be struggling to decide whether you should hire a boo...read more
5 Bookkeeping Services Business Owners Should Expect , Chandler, Arizona
When it comes to hiring the right person to oversee bookkeeping, it’s worth the effort to do a little homework. Partner with the wrong company, and hard-earned money and time are&nbs...read more
Why Bookkeeping Services Are Invaluable to Keeping Track of Your Accounts, Chandler, Arizona
Whether you’re a business owner or simply want to manage your personal finances, bookkeeping services are a great way to keep track of your accounts. From tax filing to general ...read more
What to Bring to Your First Bookkeeping Services Meeting, Chandler, Arizona
Bookkeeping services help you manage your company’s finances by keeping track of income and expenditures. Working with a CPA to fulfill your needs can also make it easier to pre...read more