Tax breaks can help reduce the financial burden of raising children. Some – although not all – of these tax breaks can be divided between the parents after a divorce, which in turn can increase the net funds available to support the children. Here is how this works.
Preliminary Requirements for Dividing Tax Breaks Between Parents
There are four preliminary requirements parents must meet before they can split the tax breaks for a child:
- The parents must be divorced or legally separated, or must have lived apart at all times for the last six months of the year;
- The parents separately or together must have provided more than half of the child’s total financial support;
- One or both parents must have custody during the year; and
- The custodial parent must have waived his or her right to claim the child as a dependent for that year, meaning that parent will not get the child’s exemption on their tax return. For this waiver to be used, the custodial parent must sign IRS Form 8332, and the noncustodial parent must always attach a copy of the Form 8332 to his or her tax return for any tax year that he or she relies on the waiver.
Unless all of these requirements are met, the tax breaks cannot be divided; instead, they will all go to the custodial parent. For tax purposes, the “custodial parent” is the parent with whom the child lives for the greater number of nights during the year. The non-custodial parent is the parent with whom the child lives with for less than 50% of the year. This tax definition is not affected by any contrary language in the divorce decree.
It should also be noted that the noncustodial parent can revoke his or her waiver of right to claim the child as a dependent. If a revocation of waiver is contrary to the provisions of the divorce decree, a court hearing will be required for the revocation to be effective. Also, these tax breaks can only be divided between the parents, and not with other family members who are providing some of the financial support to the child.
Tax Breaks Available to Noncustodial Parent
When the four requirements above are met, the noncustodial parent can claim these tax breaks:
- The child’s personal dependent exemption ($3,800);
- The child tax credit (up to $1,000 per child, depending upon your income);
- Additional child tax credit (claimable where amount of child tax credit is greater than the total income tax owed); and
- Tuition and fees deduction / education tax credits. These can include the higher education tax credits ($2,500 over four years of college for the American Opportunity credit and $2,000 for the Lifetime Learning credit), a deduction of up to $2,500 for student loan interest paid by the parent, and a tuition deduction of up to $4,000 for higher education tuition and mandatory enrollment fees. These are not available to parents whose are married and filing separate returns, and all are phased out for higher income earners.
Tax Breaks Available to Custodial Parent
If the noncustodial parent claims the dependency exemption, the custodial parent is still eligible to claim these child-related tax breaks:
- Head of household filing status (reduces the net tax rate);
- Child and dependent care tax credit (in 2012, up to $3,169 for one child, up to $5,891 for three or more children);
- Earned income tax credit; and
- Federal-income-tax-free reimbursements for childcare expenses under an employer plan.
Tax Breaks Available to Both Parents
Even if the custodial parent does not waive his or her right to claim the child as a dependent by signing IRS Form 8332, if the first three noncustodial parent rule requirements are still met (the support requirement, the divorced or separated requirement, and the custody requirement), both the noncustodial and the custodial parent can usually claim these tax breaks:
- Itemized deductions for the child’s medical expenses paid by the parent;
- Tax-free employer-provided healthcare benefits for the child; and
- Tax-free health savings account (HSA) distributions to cover the child’s medical expenses.
Making a Signed Form 8332 Part of a California Divorce Decree
Because the division of these deductions can make a great difference in the finances of the parents, and can actually free up more income for support of the children, Minella Law Group always considers their impact when advising our California divorce clients.
Where the parents have agreed to divide the tax child tax breaks, we include in the divorce decree a requirement that for each child, the custodial parent sign a completed IRS Form 8332 that includes the future tax years when that child will be a dependent. If the divorced parents later have a falling-out, no additional court hearings will be required to get Form 8332 signed. If a custodial parent has signed a Form 8332 that includes future years as required by the divorce decree, and later wishes to revoke his waiver of the dependency exemption, a court hearing will be needed to modify the decree to revoke the waiver.
Detailed information on all of the current child tax breaks that can be divided between divorced parents can be found on the IRS government website at IRS Publication 504, Divorced or Separated Individuals.
Call Minella Law Group for all Divorce Issues
The experienced divorce lawyers of Minella Law Group can provide excellent legal guidance to protect all of your financial concerns, including division of tax breaks relating to children, in a divorce or domestic partnership dissolution.
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