The new year always brings aboout issues of taxes, and in cases in which a child’s parents are not married or do not live together, the question of the tax status for each indiviudal and who gts to claim the child and all the credits for the child.
The easiest answer is.. what does your Seperation Agreement or Parenting Plan say? The answer to whom can claim the child, as a dependent, is found there. Of courrse, the new tax law has eliminated dependent exemptions, so that becomes less important. So now the focus shifts to 4 main areas
1) Filing Status
2) Child Tax Credit
3) Child Care credit
4) Earned Income credit
Your filing status will be based on your current situation. If you have married, then your filing status will be married filing either jointly or seperately. But if you are single, your filing status will depend on whether or not you can claim your dependent child that year. If you can claim the dependent child, or have other children you can claim, then you can file Head of Household (HoH). If you cannot, then you have to file single. The standard deduction amount for HoH is much higher then filing single, which can result in a nasty tax bill, come April, if you aren’t prepared for the difference.
The child tax credit, now increased to $2,000 per child, follows the dependent. This means the parent that is claiming the child, that year, as a dependent, also gets the child tax credit.
The child care credit does not follow the child, it is always claimable by the parent who has the most custody of the child in each year. This becomes difficult when parents split the child care bills and split custody 50/50. In those cases, your parenting plan should lay out specifically who gets the deduction each year. Options, including FSA accounts for dependent care, can be worked out between the parties, but these are subject to limitations, specific IRS rules to ensure you do not claim more then eligible for.
EIC always remains with the main custodial parent, if they are otherwise income eligible. Both EIC and the Child care credit do not require the parent to also claim the child as a dependent. This means that one parent can claim the child, get the child tax credit, while the other parent still claism the child care credit and EIC. If both parents would be eligible for EIC and they share custody 50/50, your parenting plan or seperation agreement should address whom gets the claim each year. I further like to award 1 additional day, each year, to that parent in order to make sure they have the most custody if the IRS starts counting.
Usually tax problems show up because the wrong parent claimed the child and filed their taxes first. The IRS automatically defaults the dependent to the parent with the most custodial time. This means that if both parties file and claim the child, the IRS will take your parenting plan, count the days, and award the deduction on who had 50.1%+. They will no longer look at how the plan lays out the deduction. In order to preserve your deductions, your parenting plan or seperation agreement shoudl require each party to fill out and sign a form 8332 Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. This document will ensure the proper parent is granted the exemption, each year, even if both file and claim it. Please note, the name of this form is subject to change due to the new tax laws. Othwerwise, your solution, if the wrong parent claims the child and is granted the exemption, does not lie with the IRS, it lies in a Motion for Contempt with the family law court.
Tax issues over dependent children can be a huge hassle without the proper planning and wording in your parenting plan. Having an experienced attorney working on your case can help to avoid those pitfalls and make tax season, each year, less worrisome, as you will know exactly what you are eligible to claim each and every year.