What You Should Know About Your Eligibility for the Federal Child Tax Benefits After Your Divorce is Final.

When you were married, you and your spouse may have been able to reduce your federal income taxes because you were eligible to take one or more child tax benefits, which include:

  1. Dependent’s exemption
  2. Child tax credit
  3. Additional child tax credit
  4. EIC earned income credit
  5. Child and dependent care credit
  6. Exclusion for dependent care assistance benefits

However, there will be changes to your tax return after your divorce is final.  If you have minor children, you should be aware of potential tax consequences resulting from certain provisions of your final custody order.  This article gives general information about what can happen when the judge enters your final custody order.  To learn more, you should talk to your divorce lawyer and you should consult a tax accountant or other tax preparer.  Tax software is great, but no substitute for talking to a live person to make sure you can take steps to protect yourself from being surprised when your taxes go up or down after your divorce.

After your divorce is final, your tax filing status will change from married to single or head of household.

The most obvious change after you get divorced is the change in your tax filing status.  If you were divorced in 2015 then you will not be filing a joint tax return for 2015 because your marital status will have changed before the end of the year.   For divorced people, there are two ways to file a tax return: single or head of household   The IRS has specific guidelines for determining which parent would be eligible for the head of the household filing status.  The general rule is that the parent who provides more than 50% of the support for a child and with whom the child lives for more than 50% of the year is eligible for the head of the household filing status.  The IRS considers this parent the custodial parent. Figuring out what status to use can be complicated if you have shared physical custody or a hybrid custody arrangement.  So talk to a tax expert.

After your divorce, your eligibility to claim one or more of the child tax benefits on your tax return could change depending on whether you are the custodial parent or the non-custodial parent for federal tax purposes.

The IRS has specific rules which apply to divorced parents and the rules are tied to which parent is considered the “custodial parent.” Only the custodial parent can claim the earned income credit, the child and dependent care credit, and the exclusion for dependent care assistance benefits. However, the exemption for dependents and the child tax credits do not necessarily remain with the custodial parent  Why? Because the IRS gives a state court the authority to shift the dependent’s exemption from the custodial parent to the non-custodial parent.   If this happens, then then the custodial parenthas to file form 8332 – Release/Revocation of Claim to Exemption for Child by Custodial Parent.  Talk to your tax expert about whether you or your ex-spouse has to file this form and if there is anyway to avoid having to file it every year.

In Alaska, the court can shift the exemption for dependents from the custodial parent to the non-custodial parent.

The federal tax “exemption” for dependents allows the custodial parent to subtract a set dollar amount per child from the parent’s adjusted gross income on the parent’s tax return.  So if, for example, you have two children and you are the custodial parent, you get to reduce your taxable income by the amount of the exemption times 2.  Lower taxable income means lower taxes.  Talk to your tax expert about the exemption amount for 2015.

Alaska Civil Rule 90.3(k) authorizes the court to shift one or more of the dependent’s exemptions from the custodial parent to the non-custodial parent.  Note that the exemption can’t be split.  So if you have one minor child, for example, the court can’t give each parent 50% of the total amount of the exemption.  However, the court can order the parents to take the exemption for your child in alternate years.  If you have two or more children, the court could give the non-custodial parent one exemption and let the custodial parent keep the other exemption.   The final child custody order will state whether the court has shifted the exemption.  The order won’t use the word “shift”.  It will state the court has allocated the tax exemption(s) between the parties.

If the court shifts the exemption from the custodial parent to the non-custodial parent, the eligibility for the child tax credit automatically shifts to the non-custodial parent.

The child tax credit goes to the custodial parent.  If the parent makes less than the cap on the parent’s income, the custodial parent can subtract the child tax credit for each eligible child ffrom the taxes the parent would otherwise owe the government. This can be a big deal.

The state court is not authorized to shift a child tax credit.  But, under federal tax law, shifting the dependent’s exemption to the non-custodial parent, automatically makes the non-custodial parent eligible for the child tax credit.  So even if you are the custodial parent, for each exemption you lose, you will also lose a child tax credit.

For each dependent exemption awarded to you, you would probably save money in taxes you pay to the federal government.

To keep things simple here, let’s assume that you have two children and they are going to live primarily with your or the other parent.  For this discussion, you can decide which parent you will be.  If the judge were to shift the dependent’s exemptions (a total of 2) from the other parent to you, you would be eligible for two child tax credits, subject to certain income limitations.   So two things would happen: your taxable income would go down.  The child tax credit(s) would be subtracted from your taxes.  But if your taxes go down, then it is possible your child support would go up.  It is complicated to figure out exactly how your tax return and/or child support would be affected if the court shifted one or more exemptions to you. So talk to your tax advisor and divorce attorney.

For each dependent exemption awarded to the other parent, you will lose corresponding child tax credit.  This means you could pay more in federal taxes to the government.

If the judge were to award one or more dependent deduction to the other parent, you would lose the corresponding the child tax credit automatically.  The result will probably be an increase in the amount of federal taxes you would pay.  For example, let’s say you are the custodial parent.  For each dependent exemption awarded to the other parent, your income would go up by the amount of the exemption and you would lose the corresponding number of tax credits.  So if you have two children, you would lose two exemptions and two tax credits.

The most important thing for you to understand is that that the judge’s decision to shift one or move dependent’s exemptions from one parent to the other automatically shifts the child tax credit “tied” to the exemption.  This isn’t even mentioned in Civil Rule 90.3(k).  But it is something every divorced parent needs to know.

Posted in: Divorce