Divorce can result in several tax issues, including which parent will claim the child-related tax breaks. Sometimes, but not always, it is the parent that claims the child as a dependent.
Dependency Exemption
For tax purposes, the parent who has custody for the greater part of the year, ie more than 50%, is the parent who can claim that child and is called the custodial parent. The other parent is considered the noncustodial parent.
Generally, only the custodial parent can claim the dependent exemption deduction for the child. However, if may make financial sense in some cases for the custodial parent to agree to release the deduction and the right to claim the designated child as a dependent to the other parent.
The value of the deduction for 2016 is $4,050.
The designated child can be treated as a qualifying child of the noncustodial parent if all the following requirements are met.
Support: Over half the child’s support for the year must be provided by one or both parents.
Divorced or separated: The parents must be divorced or separated under a written agreement at the end of the year or have lived apart during the last six months of the year.
Custody: The child must be in the custody of one or both parents for over half the year.
Written declaration: The custodial parent must sign a written declaration releasing to the noncustodial parent the right to claim the designated child as a dependent for the year.
To meet this requirement, the custodial parent should sign IRS Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent). The noncustodial parent must then attach a copy of Form 8332 to his or her Form 1040.
When all these requirements are met, the noncustodial parent is eligible for the tax breaks listed below, based on the designated child.
Higher education tax credits: The American Opportunity credit can be worth up to $2,500 during the first four years of a child’s college education. The Lifetime Learning credit can be worth up to $2,000, and it covers just about any higher education tuition costs. Both credits are phased out as the noncustodial parent’s income goes up, but the Lifetime credit is phased out earlier.
Student loan interest deduction: This deduction can be up to $2,500 for qualified student loan interest expense paid by the noncustodial parent (subject to phase-out for higher-income parents).
Tuition deduction: This deduction can be as much as $4,000 for higher education tuition and mandatory enrollment fees. At higher income levels, the maximum deduction drops to $2,000 before being completely disallowed at still-higher levels.
Important point: When the noncustodial parent rule isn’t in effect for a child, the preceding tax breaks are off limits for the noncustodial parent, but they can usually be claimed by the custodial parent.
Some breaks are available to both parents
Whether the noncustodial parent rule applies or not, the noncustodial parent can usually claim the tax breaks listed below as long as the first three noncustodial parent rule requirements are met (the support requirement, the divorced or separated requirement, and the custody requirement). The custodial parent can also usually claim these breaks.
* Itemized deductions for the child’s medical expenses paid by the parent.
* Tax-free employer-provided healthcare benefits for the child.
* Tax-free health savings account (HSA) distributions to cover the child’s medical expenses.
Some breaks are only allowed to the custodial parent
The noncustodial parent cannot claim the following breaks based on a child to whom the noncustodial parent rule applies. The custodial parent can claim them if he or she meets the applicable tax-law requirements.
Head of Household (HOH) Filing Status: Filing as an HOH is better than filing as a single taxpayer, because the standard deduction is bigger and the tax brackets are looser.
Earned Income Tax Credit: For 2016, this credit can be worth up to $3,373 for one qualifying child, $5,572 for two kids, and $6,269 for three or more. The credit is phased out as the custodial parent’s income increases.
Child Care Tax Credit: This credit can range from $600 to $1,050 for one qualifying child; $1,200 to $2,100 for two or more, based on the custodial parent’s income.
Tax-Free Childcare Assistance: This allows up to $5,000 in federal-income-tax-free reimbursements for the custodial parent’s qualified childcare expenses under an employer-sponsored dependent care flexible spending account (FSA) arrangement.
For more information
For more information, check out IRS Publication 504 (Divorced or Separated Individuals) at the IRS website.
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