Just as with any other matter in life, a divorce can have many far-reaching consequences that parties might not have considered beforehand. One such example includes that of taxes. Not only is a party’s available tax options limited after a divorce, there are certain options that no longer become available to a spouse, especially if there are children involved. While the primary goal of parents should be to provide for the best interests of the child in a divorce, it is also important to be aware of any effect this might have on a party’s taxes.
Tax Benefits and Credits
The government provides several tax benefits to parents of children. From allowing for a child exemption to the head of household status, having custody over a child can provide some tax benefits that can help offset the expense of raising a child. While the government does provide certain tax benefits for parents or guardians of children, these benefits can only apply to one spouse in the event of divorce. Generally, these credits will apply only to the custodial parent.
Child Tax Credit
The first tax credit that might be available to parents is the Child Tax Credit, which is available to any parent with a qualifying child. The definition of a qualifying child, however, is not limited to a biological son or daughter, and can encompass a variety of related persons, ranging from half-brothers to granddaughters. A qualifying child is any child who:
-is your son, daughter, foster child, sibling, step-sibling, half-sibling, or any descendant of any of them;
-was under the age of 17 by the end of the tax year;
-lived with you for more than half the year;
-is claimed as a dependent on your return;
-does not file a joint return for the year; and,
-was either a U.S. citizen, a U.S. national, or a U.S. resident alien.
In addition to all of these requirements for the child, the laws regulating the Child Tax Credit also limit how much a parent may claim depending on how much they earn during the year.
If a spouse is not filing a joint return, then the phasing out of the Child Tax Credit begins at $75,000. The amount a spouse may claim will then be reduced based on how much more they earn. Conversely, it is also possible for an individual to not earn enough to gain this credit. In these circumstances, it is still possible for an individual to get a refund, even if they do not pay any tax, through the Additional Child Tax Credit.
While it is true that only a custodial parent may claim the Child Tax Credit, it is possible for that parent to allow the noncustodial parent to claim the Child Tax Credit, along with any exemptions that may apply. The only thing a custody parent would need to do in this situation is fill out Form 8332, Release of Claim to Exemption for Child by Custodial Parent. By signing this form, a custodial parent agrees not to claim exemptions for the child, or the Child Tax Credit, which allows the noncustodial parent to do so.
The Child and Dependent Care Credit
Whereas the Child Tax Credit allows a tax credit for parents who have custody over a minor child, the Child and Dependent Care Credit allows parents to receive a tax credit based on a percentage of the amount of work-related expenses paid to a care provider for the care of a qualifying individual. In order to claim the Child and Dependent Care Credit, a person must meet the following requirements:
-the care must be for at least one qualifying individual;
-you must have earned income during the year;
-you must pay child and dependent care expenses so you can work or look for work;
-payments must be made to someone you cannot claim as a dependent, and cannot be made to the other parent; and,
-you must identify the care provider on your tax return.
While the term “qualifying individual” is not just limited to children, the regulations do restrict what kind of child may qualify as a qualifying individual. Specifically, any qualifying dependent child who was under the age of 13 when care was given will be a qualifying individual. In addition, mentally or physically disabled persons of any age who would have qualified as your dependent are also qualified individuals for the Child and Dependent Care Credit.
Earned Income Credit
Last, but not least, is the Earned Income Credit (EIC), which is a tax benefit for working people with low to moderate income. While you cannot claim an EIC specifically for your child, having custody of a child can affect whether or not you can claim the EIC.
One requirement to qualify for an EIC is that you must either have a qualifying child, or be a person between 25 and 65, who is not a dependent of another person, and has lived in the U.S. for more than half of the year. A qualifying child under the EIC is someone who:
-is either under the age of 19, or a full-time student under the age of 24, by the end of the year, or is any age and permanently disabled at any time of the year;
-is either a son, daughter, sibling, half-sibling, adopted child, stepchild, stepsibling, eligible foster child, or descendant of any of them;
-lived with you for more than half the year; and,
-has not filed a joint return, or your child and his spouse were not required to file and only filed to claim a refund.
While there are several tax benefits and credits available to custody parents, tax law can be complex and frustrating at times. In these circumstances, you might want to contact an experienced tax attorney to help.